As filed with the Securities and Exchange Commission on July 17, 1996
Registration No.____________
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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. Employer
jurisdiction Industrial Classification Identification No.)
of incorporation Code Number)
or organization)
777 South Flagler Drive
West Palm Beach, FL 33401
(407) 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
(407) 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
Title of Proposed Proposed Amount
each class maximum maximum of
of securities Amount to be offering price aggregate registration
to be registered registered per share(1) offering price(1) fee
- --------------------------------------------------------------------------------
6 3/4%
Convertible
Subordinated
Debentures due
2003 $100,000,000 100% $100,000,000 $34,483
- --------------------------------------------------------------------------------
Shares of
Common Stock,
$.01 par value 3,546,099 Not Not None(2)
shares(2) applicable(2) Applicable(2)
- --------------------------------------------------------------------------------
(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) 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
Registration Statement Item Location in Prospectus
1. Forepart of Registration Statement and Outside Front Cover Pages of
Outside Front Cover Page of Registration Statement and
Prospectus Prospectus
2. Inside Front and Outside Back Cover Inside Front Cover Page
Pages of Prospectus
3. Summary Information, Risk Factors and Prospectus Summary; Risk
Ratio of Earnings to Fixed Charges 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 Description of Debentures;
Be Registered Description of Common Stock
10. Interests of Named Experts and *
Counsel
11. Information with Respect to the Prospectus Summary; Summary
Registrant 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
__________
* Omitted as inapplicable.
<PAGE>
PROSPECTUS SUBJECT TO COMPLETION
July 17, 1996
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
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
_______________
This Prospectus relates to 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 (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 the 60th day following the date of original issuance of the Debentures 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
July 12, 1996, the closing price of the Common Stock as reported by Nasdaq was
$22.50 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 April 30, 1996, the Company had Senior Indebtedness in the amount of
approximately $7.0 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 were transferred to the Selling Securityholders pursuant to Rule 144A,
Regulation S under the Securities Act and 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.
_______________
Prospective investors should carefully consider the factors set forth under
the section "Risk Factors" beginning on page 9
_______________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Date of this Prospectus is _________________, 1996
<PAGE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information and representations must not
be relied upon as having been authorized by the Company. This Prospectus does
not constitute an offer to sell or a solicitation of any offer to buy the
securities described herein by anyone in any jurisdiction in which such offer or
solicitation is not authorized, or in which the person making the offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make such offer or solicitation. Under no circumstances shall the delivery of
this Prospectus or any sale made pursuant to this Prospectus create any
implication that the information contained in this Prospectus is correct as of
any time subsequent to the date of this Prospectus.
TABLE OF CONTENTS
Page
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............................................35
Business................................................................46
Management..............................................................59
Certain Transactions....................................................65
Principal Stockholders..................................................67
Description of Debentures...............................................68
Description of Capital Stock............................................75
Certain United States Federal Income
Tax Consequences.....................................................79
Selling Securityholders.................................................82
Plan of Distribution....................................................83
Legal Matters...........................................................84
Experts.................................................................84
Additional Information..................................................86
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 128 physicians and acquired several medical support service
companies and a medical facility development company. The Company also owns a
43.75% interest in a newly formed management services organization in
Connecticut and a 50% interest in a newly formed management services
organization in Georgia that provide management services to independent
physician associations composed of over 375 multi-specialty physicians.
Increasing concern over the cost of health care in the United States has led to
numerous changes affecting the physician provider community, including the
development of managed care and risk-based contracting arrangements. Based on
data from the United States Health Care Financing Administration, industry
sources have estimated that in 1995 the nation's 650,000 physicians generated
approximately $200 billion in physician service revenues. The Company believes
independent physicians are inadequately prepared to respond to the changing
health care market because they typically have high operating costs relative to
revenue and lack both purchasing power with vendors and sufficient capital to
purchase new clinical equipment and management information systems. In order to
be competitive, many physicians are seeking affiliations with larger entities,
including physician practice management companies.
The Company believes that the providers of disease management services in the
United States, including cancer care providers, are highly fragmented. There are
approximately 6,000 oncologists practicing in the United States, most of whom
practice alone or in small groups, and there are hundreds of independent
outpatient and free-standing cancer treatment centers. This fragmentation
results, in part, from the fact that the treatment of cancer frequently requires
a multi-disciplinary approach in a variety of settings involving numerous health
care professionals with different specializations.
The Company believes that its strategy of acquiring and integrating independent
physician practices and medical support services into specialty networks creates
synergies, achieves operating efficiencies and responds to the cost-containment
initiatives of payors, particularly managed care companies. The Company has
focused its disease management efforts on the acquisition of oncology practices
and, to date, has acquired the practices of and affiliated with 60 oncologists.
The Company also provides comprehensive cancer-related support services at 11
radiation treatment centers and two diagnostic imaging centers and manages
infusion therapy services from three regional offices. The Company intends to
develop additional disease management services for the treatment of other
chronic illnesses such as diabetes, cardiovascular diseases and infectious
diseases.
In certain targeted markets, the Company organizes its affiliated physicians and
related medical support services into integrated clusters of disease specialty
and primary care networks, which it terms local provider networks ("LPNs"). LPNs
are designed to provide a comprehensive range of physician and medical support
services within specific geographic regions. The Company believes that its LPN
structure will achieve operating
3
<PAGE>
efficiencies and enhance its ability to secure contracts with managed care
organizations. The Company currently has contracts with managed care
organizations under which the Company and its affiliated physicians provide
certain cancer-related health care services to over 200,000 covered lives. To
date, the Company has established an LPN in each of the Southeast Florida,
Atlanta, Connecticut and Washington, D.C./Baltimore areas. The Company intends
to establish additional LPNs by affiliating with IPAs.
The Company also provides medical facility development services to related and
unrelated third parties for the establishment of health parks, medical malls and
medical office buildings. Such services include project finance assistance,
project management, construction management, construction design engineering,
physician recruitment, leasing and marketing. While the Company incurs certain
administrative and other expenses in the course of providing such services, it
does not incur costs of construction or risks of project ownership. The
Company's strategy in financing its projects is to involve future tenants as
significant investors in and owners of the developed medical facilities. Because
most of its tenants are physicians and medical support service companies, the
Company believes that the relationships that it develops with these parties
through its medical facility development efforts will greatly enhance the
Company's ability to affiliate with physicians and acquire physician practices
and medical support service companies. Further, the Company believes that
medical facility development in certain markets will aid in the integration of
its affiliated physicians and medical support services.
The Company affiliates with physicians through management agreements with
physician practices or employment agreements with individual physicians. When
affiliating with physicians, the Company generally acquires the assets of the
physicians' practices, including its equipment, furniture, fixtures and supplies
and, in some cases, goodwill and management service agreements, of the
physicians' practices. Currently, the Company manages the practices of 98
physicians and employs another 30 physicians. The Company derives revenues from
affiliated physicians through management fees charged to managed physician
practices and from charges to third parties for services provided by employed
physicians.
The Company manages its home health care and lithotripsy services from eight
local or regional offices. The Company also operates seven mobile lithotripters
which provide services to approximately 70 hospitals and other health care
facilities.
The Company's objective is to be a leader in the physician practice management
industry. The Company plans to achieve this objective by: (i) developing disease
management networks in specific geographic locations by acquiring the practices
of and affiliating with high profile disease specialty and primary care
physicians, multi-specialty physician groups and independent practice
associations, (ii) organizing its physician practices and related medical
support services into LPNs, (iii) utilizing its medical facility development
services to promote its affiliations and acquisitions as well as the integration
of its affiliated physicians and medical support services; (iv) pursuing
contractual arrangements with managed care organizations, (v) implementing
information systems to improve patient care and provide outcome studies and
other data and (vi) achieving operating efficiencies through the consolidation
of the overhead and administrative functions of its physician practices.
4
<PAGE>
The Offering
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 the 60th day
following the date of the original issuance
of the Debentures 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 April
30, 1996, the Company had Senior
Indebtedness in the amount of approximately
$7.0 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."
5
<PAGE>
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."
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."
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 Combined Consolidated
June 24, 1994 Combined Consolidated Three Three Combined
(inception) Year Month Months Months Year
to Ended Ended Ended Ended Ended
December 31, December 31, January 31, March 31, April 30, December 31,
1994 1995 1996(3) 1995 1996(3) 1995
(Audited) (Audited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenue........................ $ 2,447 $ 70,733 $10,715 $ 6,669 $37,207 $125,110
Operating expenses:
Cost of affiliated
physician management
services...................... -- 9,656 2,797 -- 8,533 34,612
Salaries, wages and
benefits....................... 2,142 31,976 3,637 4,510 11,660 43,619
Depreciation and
amortization................... 107 3,863 535 338 1,593 6,612
Rent............................. 249 4,503 565 326 1,706 6,079
Earn out payment................. -- 1,271 -- 1,111 -- --
Provision for closure loss....... -- 2,500 -- -- -- 2,500
Other............................ 1,098 22,900 3,434 2,264 9,858 35,410
----- ------ ----- ----- ----- ------
3,596 76,669 10,968 8,549 33,350 128,832
----- ------ ------ ----- ------ -------
Income (loss) from
operations....................... (1,149) (5,936) (253) (1,880) 3,857 (3,722)
------ ------ ---- ------ ----- ------
Interest expense................... 95 4,852 812 320 269 8,433
Minority interest.................. 52 806 81 105 34 --
Other nonoperating
(revenue) expense................ -- -- -- -- -- (44)
(Income) loss from investment
in affiliates.................... -- (569) 30 -- (142) (647)
------ ------ ---- ------ ----- ------
Income (loss) before income
taxes............................ (1,296) (11,025) (1,176) (2,305) 3,696 (11,464)
Income tax provision (4)........... -- -- -- -- 1,404 --
------ ------ ---- ------ ----- ------
Net income (loss).................. $(1,296) $(11,025) $(1,176) $(2,305) $ 2,292 $(11,464)
====== ====== ==== ====== ===== ======
Net income per share (5)........... $ 0.11
Pro forma (loss) per =====
share (6)........................ $ (0.63)
Operating Data ======
(Unaudited):
Number of Affiliated
physicians (7):
Cancer........................... -- 55 55 10 55 55
Primary care..................... -- 14 14 4 15 14
Other speciality................. -- 34 34 -- 34 34
Revenues:
Cancer services.................. $ 685 $ 44,905 $ 6,712 $ 2,106 $21,133 $78,793
Non-cancer physician
services......................... -- 7,705 2,281 220 7,234 23,846
Other medical services........... 1,762 18,123 1,722 4,343 5,172 18,842
Medical facility development..... -- -- -- -- 3,668 3,629
------ ------ ---- ------ ----- ------
Total................... $ 2,447 $ 70,733 $10,715 $ 6,669 $37,207 $125,110
====== ====== ==== ====== ===== ======
</TABLE>
7
<PAGE>
April 30, 1996
Actual As Adjusted
(8)
(Unaudited) (Unaudited)
Balance Sheet Data:
Cash and cash equivalents................. $ 34,142 $117,682
Working capital........................... 39,872 129,105
Total assets.............................. 174,420 261,460
Long-term debt, less current maturities... 20,166 12,899
Convertible Subordinated Debentures....... -- 100,000
Total shareholders' equity................ 129,511 129,511
(1) The Company was incorporated in October 1995 to combine the business
operations of certain companies (the "Related Companies") controlled by
Abraham D. Gosman, the Company's Chairman, President and Chief Executive
Officer. See Note 3 of Notes to Combined Financial Statements of the
Company. The business operations of the Related Companies were acquired
from third parties in transactions completed between September 1994 and
January 1996. Simultaneously with the closing of the Company's initial
public offering on January 23, 1996, the Related Companies were
transferred to the Company in exchange for 13,307,450 shares of Company
Common Stock (the "Formation"). The historical combined (representing
periods prior to the Formation) or consolidated financial data represents
the combined or consolidated financial position and results of operations
of the Company and the Related Companies for the periods presented, in
each case from the respective dates of acquisition. Each of the
Acquisitions (as defined herein), except where noted, was accounted for
under the purchase method of accounting. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) Gives effect to (i) those Acquisitions which were completed as of January
31, 1996, (ii) the sale of the Common Stock offered in the Company's
January 1996 initial public offering and the application of the net
proceeds therefrom, 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
Combined Financial Information."
(3) In January 1996, the Company changed its fiscal year end from December 31
to January 31.
(4) Provisions for income taxes have not been reflected in the combined
financial statements because there is no taxable income on a combined
basis.
(5) Net income per share is calculated based upon 21,529,950 total shares
outstanding.
(6) Pro forma loss per share has been calculated based upon 18,074,117 shares
outstanding which was derived as follows: (i) total shares outstanding
prior to the Company's January 1996 initial public offering of 13,307,450
shares (which includes pro forma total shares outstanding at December 31,
1995 of 11,207,450 shares plus 266,666 shares issued for the purchase of
the Nutrichem, Inc. minority interest plus 1,833,334 shares issued in the
Formation to certain stockholders of DASCO (as defined herein), plus (ii)
shares of 4,766,667 from which the initial public offering proceeds were
used to repay debt and amounts due to shareholder in the amount of
$71,500.
(7) Includes both employed and managed physicians. There were 25 employed
physicians at April 30, 1996.
(8) Adjusted to give effect to the sale of the Debentures offered in the Debt
Offering and the application of the net proceeds therefrom.
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 $2.3 million from February 1, 1996 to
April 30, 1996, there can be no assurance that the Company will continue to be
profitable. See "Unaudited Pro Forma Combined Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risks Related to Growth Strategy
The Company's strategy involves growth primarily through acquisition.
The Company is subject to various risks associated with its acquisition growth
strategy, including the risk that the Company will be unable to identify,
recruit or acquire suitable acquisition candidates or to integrate and manage
the acquired practices or companies. The growth of the Company is largely
dependent on the Company's ability to form networks of affiliated physicians
from its acquired practices, to manage and control costs, and to realize
economies of scale. Any failure of the Company to implement economically
feasible acquisitions and affiliations may have a material adverse effect on the
Company. There can be no assurance that the Company will be able to achieve and
manage planned growth, that the assets of physician practice groups or other
health care providers will continue to be available for acquisition by the
Company, that the liabilities assumed by the Company in any acquisition will not
have a material adverse effect on the Company, or that the addition of physician
practice groups or other health care providers will be profitable for the
Company.
The Company has entered into letters of intent to acquire the
practices of and affiliate with additional physicians and with other entities.
While the Company intends to pursue the consummation of the transactions
described in these letters of intent, there can be no assurance that any or all
of these transactions will be consummated.
Need for Additional Financing
The Company's acquisition and expansion programs will require
substantial capital resources. In addition, the operation of physician groups,
integrated networks and related medical support service companies requires
ongoing capital expenditures. The Company expects that its capital needs over
the next several years will substantially exceed capital generated from
operations, the net proceeds of the initial public offering and the net proceeds
of the Debt Offering. To finance its capital needs, the Company plans both to
incur indebtedness apart from the Debt Offering and to issue, from time to time,
additional debt or equity securities, including Common Stock or convertible
notes, in connection with its acquisitions and affiliations. The Company has
received a commitment from PNC Bank, National Association, for a $30 million
revolving credit facility and anticipates closing this financing on or about
July 31, 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."
9
<PAGE>
Government Regulation
Providers of health care services, including physicians and other
clinicians, are subject to extensive federal and state regulation. The fraud and
abuse provisions of the Social Security Act prohibit the solicitation, payment,
receipt or offering of any direct or indirect remuneration in return for, or the
inducement of, the referral of patients, items or services that are paid for, in
whole or in part, by Medicare or Medicaid. These laws also impose significant
penalties for false or improper billings for physician services and impose
restrictions on physicians' referrals for designated health services to entities
with which they have financial relationships. Violations of these laws may
result in substantial civil or criminal penalties for individuals or entities,
including large civil monetary penalties and exclusion from participation in the
Medicare and Medicaid programs. Similar state laws also apply to the Company.
Such exclusion and penalties, if applied to the Company's affiliated physician
groups or medical support service providers, could have a material adverse
effect on the Company. See "Business -- Government Regulation."
The laws of many states prohibit business corporations such as the
Company from exercising control over the medical judgments or decisions of
physicians and from engaging in certain financial arrangements, such as
splitting fees with physicians. These laws and their interpretations vary from
state to state and are enforced by both the courts and regulatory authorities,
each with broad discretion. Expansion of the operations of the Company to
certain jurisdictions may require structural and organizational modifications of
the Company's form of relationship with physician groups, which could have an
adverse effect on the Company. There can be no assurance that the Company's
physician management agreements will not be challenged as constituting the
unlicensed practice of medicine or that the enforceability of the provisions of
such agreements, including non-competition agreements, will not be limited.
Under certain provisions of the Omnibus Budget Reconciliation Act of
1993 known as "Stark II," physicians who refer Medicare and Medicaid patients to
the Company for certain designated services may not own stock in the Company,
and the Company may not accept such referrals from physicians who own stock in
the Company. Stark II contains an exemption which applies to the Company during
any year if at the end of the previous fiscal year the Company had stockholders'
equity in the amount of at least $75 million. The Company was not eligible for
this exemption as of its fiscal year ending December 31, 1995. In 1996, the
Company changed its fiscal year end to January 31, at which time it satisfied
the Stark II stockholders' equity exception. Violation of Stark II by the
Company could have a material adverse effect on the Company.
The Company believes that its operations are conducted in material
compliance with applicable laws, however, the Company has not received a legal
opinion to this effect and many aspects of the Company's business operations
have not been the subject of state or federal regulatory interpretation.
Moreover, as a result of the Company providing both physician practice
management services and medical support services, the Company may be the subject
of more stringent review by regulatory authorities, and there can be no
assurance that a review of the Company's operations by such authorities will not
result in a determination that could have a material adverse effect on the
Company or its affiliated physicians. Additionally, there can be no assurance
that the health care regulatory environment will not change so as to restrict
the Company's or the affiliated physicians' existing operations or their
expansion. The regulatory framework of certain jurisdictions may limit the
Company's expansion into, or ability to continue operations within, such
jurisdictions if the Company is unable to modify its operational structure to
conform to such regulatory framework or to obtain necessary approvals, licenses
and permits. Any limitation on the Company's ability to expand could have a
material adverse effect on the Company. See "Business -- Government Regulation."
Dependence on Third Party Reimbursement; Trends and Cost Containment
Substantially all of the Company's patient service revenues are
derived from third party payors. For the year ended December 31, 1995, the
Company derived approximately 60% of its net patient service revenues from
non-government payors and approximately 40% from government sponsored health
care programs (principally,
10
<PAGE>
Medicare and Medicaid). The Company's revenues and
profitability may be materially adversely affected by the current trend within
the health care industry toward cost containment as government and private third
party payors seek to impose lower reimbursement and utilization rates and
negotiate reduced payment schedules with service providers. The Company believes
that this trend will continue to result in a reduction from historical levels of
per-patient revenue. Continuing budgetary constraints at both the federal and
state level and the rapidly escalating costs of health care and reimbursement
programs have led, and may continue to lead, to significant reductions in
government and other third party reimbursements for certain medical charges and
to the negotiation of reduced contract rates or capital or other financial
risk-shifting payment systems by third party payors with service providers. Both
the federal government and various states are considering imposing limitations
on the amount of funding available for various health care services. The Company
cannot predict whether or when any such proposals will be adopted or, if adopted
and implemented, what effect, if any, such proposals would have on the Company.
Further reductions in payments to physicians or other changes in reimbursement
for health care services could have a material adverse effect on the Company,
unless the Company is otherwise able to offset such payment reductions.
Rates paid by private third party payors, including those that
provide Medicare supplemental insurance, are based on established physician,
clinic and hospital charges and are generally higher than Medicare payment
rates. Changes in the mix of the Company's patients among the non-government
payors and government sponsored health care programs, and among different types
of non-government payor sources, could have a material adverse effect on the
Company.
The Company is a provider of certain medical treatment and diagnostic
services including, but not limited to radiation therapy, infusion therapy,
lithotripsy and home care. Because many of these services receive governmental
reimbursement, they may be subject from time to time to changes in both the
degree of regulation and level of reimbursement. Additionally, factors such as
price competition and managed care also could reduce the Company's revenues. See
"Business -- Reimbursement and Cost Containment."
There can be no assurance that payments under governmental and
private third party payor programs will not be reduced or will, in the future,
be sufficient to cover costs allocable to patients eligible for reimbursement
pursuant to such programs, or that any reductions in the Company's revenues
resulting from reduced payments could be offset by the Company through cost
reductions, increased volume, introduction of new procedures or otherwise. See
"Business -- Reimbursement and Cost Containment."
Risks Related to Goodwill
At April 30, 1996, the Company's total assets were approximately
$174.4 million, of which approximately $47.0 million, or approximately 26.9% of
total assets, was goodwill. Goodwill is the excess of cost over the fair value
of the net assets of businesses acquired. There can be no assurance that the
value of such goodwill will ever be realized by the Company. This goodwill is
being amortized on a straight-line basis over varying periods. The Company
evaluates on a regular basis whether events and circumstances have occurred that
indicate all or a portion of the carrying amount of goodwill may no longer be
recoverable, in which case an additional charge to earnings would become
necessary. Although at April 30, 1996, the net unamortized balance of goodwill
is not considered to be impaired, any such future determination requiring the
write-off of a significant portion of unamortized goodwill would adversely
affect the Company's results of operations. See "Unaudited Pro Forma Combined
Financial Information."
Risks Associated with Managed Care Contracts
As an increasing percentage of patients come under the control of
managed care entities, the Company believes that its success will be, in part,
dependent upon the Company's ability to negotiate contracts with health
maintenance organizations ("HMOs"), employer groups and other private third
party payors pursuant to which services will be provided on a risk-sharing or
capitated basis. Under some of these agreements, a health care
11
<PAGE>
provider accepts a predetermined amount per member per month in exchange for
providing all covered services to patients. Such contracts pass much of the
economic risk of providing care from the payor to the provider. The Company's
success in implementing its strategy of entering into such contracts in markets
served by the Company could result in greater predictability of revenues, but
increased risk to the Company resulting from uncertainty regarding expenses. To
the extent that patients or enrollees covered by such contracts require more
frequent or extensive care than is anticipated, additional costs would be
incurred, resulting in a reduction in operating margins. In the worst case,
revenues associated with risk-sharing contracts or capitated provider networks
would be insufficient to cover the costs of the services provided. Any such
reduction or elimination of earnings could have a material adverse effect on the
Company. Moreover, there is no certainty that the Company will be able to
establish and maintain satisfactory relationships with third party payors, many
of which already have existing provider structures in place and may not be able
or willing to re-arrange their provider networks. Increasingly, some
jurisdictions are taking the position that capitated agreements in which the
provider bears the risk should be regulated by insurance laws. As a consequence,
the Company may be limited in some of the states in which it operates in its
attempt to enter into or arrange capitated agreements for its affiliated
physician practices, employee physicians or medical support service providers
when those capitated arrangements involve the assumption of risk.
Dependence on Physicians and Other Medical Service Providers
The Company is dependent upon its affiliations with physicians and
other medical support service providers. The Company has entered into management
and/or employment agreements with most of its physicians and other medical
service providers for terms ranging from seven to 20 years. A significant number
of the Company's affiliated physicians and other medical service providers have
the right to terminate their contracts before the expiration of their respective
terms. In the event that a significant number of such physicians or providers
terminate their contracts or become unable or unwilling to continue in their
roles, the Company's business could be materially adversely affected. Intangible
assets related to management service agreements were $16.6 million at April 30,
1996. Under certain of its agreements, the Company guarantees that the net
revenues of the practices managed by the Company will not decrease below the net
revenues that existed immediately prior to the dates of such agreements. See
"Business."
Competition
Competition in the physician practice management industry is intense.
Several companies that have established operating histories and greater
resources than the Company are pursuing acquisition, development and management
activities similar to those of the Company. In addition, some hospitals,
clinics, health care companies, HMOs and insurance companies provide services
similar to those provided by the Company. There can be no assurance that the
Company will be able to compete effectively with such competitors, that
additional competitors will not enter the market or that such competition will
not make it more difficult to consummate acquisitions, undertake development
projects and provide management services on terms beneficial to the Company. The
Company also believes that changes in governmental and private reimbursement
policies among other factors have resulted in increased competition among
providers of medical services to consumers. There can be no assurance that the
Company will be able to compete effectively in the markets that it serves. In
addition, from time to time, medical facilities developed by the Company may
lease space to physician practices or medical support service companies that
compete with the Company's services in a particular local market. See "Business
- -- Competition."
Potential Liability and Insurance; Legal Proceedings
The provision of medical services entails an inherent risk of
professional malpractice and other similar claims. The Company believes that it
does not engage in the practice of medicine, however, the Company could be
implicated in such a claim through one of its providers, and there can be no
assurance that claims, suits or complaints relating to services delivered by an
affiliated physician or medical service provider will not be asserted against
the Company in the future. Although the Company maintains insurance it believes
is adequate both as to
12
<PAGE>
risks and amounts, there can be no assurance that any claim asserted against the
Company for professional or other liability will be covered by, or will not
exceed the coverage limits of, such insurance.
The availability and cost of professional liability insurance has
been affected by various factors, many of which are beyond the control of the
Company. There can be no assurance that the Company will be able to maintain
insurance in the future at a cost that is acceptable to the Company, or at all.
Any claim made against the Company not fully covered by insurance could have a
material adverse effect on the Company.
The Company is currently a party to, or has agreed to indemnify
certain other parties with respect to, various lawsuits relating to the
acquisition of one of its subsidiaries and the operation of the subsidiary prior
to the acquisition. There can be no assurance that such lawsuits will be
resolved favorably to the Company. See "Business -- Legal Proceedings."
Medical Facility Development
The Company engages in the development of health parks, medical malls
and medical office buildings and, in connection with these projects, enters into
development contracts for the provision of all or some of the following
services: project finance assistance, project management, construction
management, construction design engineering consultation, physician recruitment,
leasing and marketing. Many of these contracts hold the Company liable for any
development cost overruns and also require the Company to indemnify the owner of
the medical facility and the owner of the land on which a medical facility is
developed against certain liabilities or losses. As a result, the Company, which
is not a contractor, enters into construction contracts with general contractors
to construct its projects for a "guaranteed maximum cost" and requires the
general contractors to maintain performance bonds and to indemnify the Company
against certain liabilities and losses. Any claim for development cost overruns
not covered by a performance bond or any request for indemnification by the
owner of the medical facility or the owner of the land on which a medical
facility is developed, if the Company is not indemnified by others, could have a
material adverse effect on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Medical Facility
Development" and "Business -- Medical Facility Development."
Control by Existing Stockholders
Mr. Gosman, Donald A. Sands and Bruce A. Rendina, the Company's
principal promoters beneficially own approximately 47% of the outstanding shares
of Common Stock and all of the Company's executive officers and directors as a
group beneficially own approximately 54.3% of the outstanding shares of Common
Stock. In addition, the Company has granted and is likely in the future to grant
the Company's executive officers and directors options to acquire shares of
Common Stock pursuant to the Company's 1995 Equity Incentive Plan. As a result,
such executive officers and directors, should they choose to act together, will
be able to determine the outcome of corporate actions requiring stockholder
approval and to control the election of the Company's Board of Directors. This
ownership may have the effect of discouraging unsolicited offers to acquire the
Company. See "Principal Stockholders."
Dependence Upon Key Personnel and DASCO
The Company is dependent upon the ability and experience of its
executive officers, and there can be no assurance that the Company will be able
to retain all of such officers. The failure of such officers to remain active in
the Company's management could have a material adverse effect on the Company.
The Company currently has employment contracts with Messrs. Sands and Rendina,
Edward E. Goldman, M.D., Jeannette M. McGill, Robert A. Miller and William A.
Sanger. The Company also has been dependent upon the existing and anticipated
contributions of its principal promoters, Messrs. Gosman, Sands and Rendina, and
DASCO. The Company believes that DASCO and the experience of Messrs. Sands and
Rendina in the medical facility 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
13
<PAGE>
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 April 30, 1996, the Company had Senior Indebtedness in the
amount of approximately $7.0 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 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
14
<PAGE>
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 Company's initial public offering of Common Stock,
the Company and the holders of all of the 13,307,450 shares of Common Stock
issued in connection with the Formation agreed not to offer, sell, contract to
sell or otherwise dispose of any shares of Common Stock, or any securities
convertible into or exercisable or exchangeable for Common Stock until July 21,
1996 without the prior written consent of Smith Barney Inc. In addition, in
connection with the Debt Offering, the Company and its directors and executive
officers agreed not to offer, sell, contract to sell or otherwise dispose of any
shares of Common Stock, or any securities convertible into or exercisable or
exchangeable for Common Stock until September 20, 1996. At such time as the
Company becomes eligible to use a registration statement on Form S-3 which could
occur approximately one year after the date of the 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 may file a
registration statement on Form S-4 to register securities of the Company to be
issued as some or all of the consideration paid for such acquisitions.
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 between September 1994 and January 1996. Simultaneously
with the closing of the Company's initial public offering on January 23, 1996,
the Related Companies were transferred to the Company in exchange for 13,307,450
shares of Company Common Stock (the "Formation"). See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Certain
Transactions." The Related Companies or the Company have acquired those
companies and physician practices discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Acquisition
Summary."
The Company's principal place of business is 777 South Flagler Drive,
West Palm Beach, Florida 33401; and its telephone number at that address is
(407) 655-3500. Unless otherwise indicated or required by the context,
references to the "Company" include its consolidated subsidiaries.
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
April 30, 1996, and as adjusted to give effect to the sale and issuance of the
Debentures offered in the Debt Offering and the application of the net proceeds
therefrom.
April 30, 1996
--------------
Historical As Adjusted
---------- -----------
(Unaudited) (Unaudited)
(In thousands)
Current portion of long-term debt................ $ 2,334 $ 2,017
Current portion of related party debt............ 2,435 2,435
Current portion of due to shareholder............ 5,376 --
------ ------
Total current portion of long-term debt.. 10,145 4,452
====== ======
Long-term debt, net of current portion........... 13,855 12,899
Due to shareholder, net of current portion....... 6,311 --
Convertible Subordinated Debentures.............. -- 100,000
------ ------
Total long-term debt..................... 20,166 112,899
------ ------
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;
21,529,950 shares issued and outstanding..... 215 215
Additional paid-in capital..................... 140,502 140,502
Retained earnings (deficit).................... (11,206) (11,206)
------ ------
Total shareholders' equity............... 129,511 129,511
------ ------
Total capitalization............................. $149,677 $242,410
====== ======
17
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
June 24, 1994
(inception) Three Months Year Month Three Months
to Ended Ended Ended Ended
December 31, 1994 March 31, 1995 December 31, 1995 January 31, 1996 April 30, 1996
<S> <C> <C> <C> <C> <C>
Ratio....... [less than] 1.0x [less than] 1.0x [less than] 1.0x [less than] 1.0x 3.86x
</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 three months ended March 31, 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 12, 1996 25.75 18.00
On July 12, 1996, the last reported sale price of the Common Stock
was $22.50. As of July 12, 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.
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<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
(In thousands, except share data)
The selected historical financial data set forth below have been derived from
the financial statements of the Company. The combined financial statements of
the Company as of December 31, 1994 and December 31, 1995 and for the period
from June 24, 1994 (inception) to December 31, 1994 and the year ended
December 31, 1995, together with the notes thereto and the related report of
Coopers & Lybrand L.L.P., independent accountants, are included elsewhere in
this Prospectus. The selected historical financial data of the Company should
be read in conjunction with the related financial statements and notes
thereto appearing elsewhere in this Prospectus. The selected pro forma
combined financial data set forth below at April 30, 1996 and for the year
ended December 31, 1995 have been derived from the unaudited pro forma
combined financial statements of the Company. The pro forma selected
financial data are not necessarily indicative of the actual results of
operations or financial position that would have been achieved had the
Acquisitions been completed as of January 1, 1995, nor are the statements
necessarily indicative of the Company's future results of operations or
financial position. See "Unaudited Pro Forma Combined Financial Information."
<TABLE>
<CAPTION>
Pro Forma
Historical (1) (2)
----------------------------------------------------------------- ------------
Combined
June 24, Combined
1994 Combined Consolidated Three Consolidated
(inception) Year Month Months Three Combined
to Ended Ended Ended Months Year
December December January March Ended Ended
31, 31, 31, 31, April 30, December 31,
1994 1995 1996 (3) 1995 1996 (3) 1995
----------- ---------- ---------- -------- ---------- ------------
(Audited) (Audited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenue $ 2,447 $ 70,733 $10,715 $ 6,669 $37,207 $125,110
--------- -------- -------- ------ -------- ----------
Operating expenses:
Cost of affiliated physician
management services -- 9,656 2,797 -- 8,533 34,612
Salaries, wages and benefits 2,142 31,976 3,637 4,510 11,660 43,619
Depreciation and amortization 107 3,863 535 338 1,593 6,612
Rent 249 4,503 565 326 1,706 6,079
Earn-out payment -- 1,271 -- 1,111 -- --
Provision for closure loss -- 2,500 -- -- -- 2,500
Other 1,098 22,900 3,434 2,264 9,858 35,410
--------- -------- -------- ------ -------- ----------
3,596 76,669 10,968 8,549 33,350 128,832
--------- -------- -------- ------ -------- ----------
Income (loss) from operations (1,149) (5,936) (253) (1,880) 3,857 (3,722)
--------- -------- -------- ------ -------- ----------
Interest expense 95 4,852 812 320 269 8,433
Minority interest 52 806 81 105 34 --
Other nonoperating (revenue)
expense -- -- -- -- -- (44)
Income from investments in
affiliates -- (569) 30 -- (142) (647)
--------- -------- -------- ------ -------- ----------
Income (loss) before income taxes (1,296) (11,025) (1,176) (2,305) 3,696 (11,464)
Income tax expense (4) -- -- -- -- 1,404 --
--------- -------- -------- ------ -------- ----------
Net income (loss) $(1,296) $(11,025) $(1,176) $(2,305) $ 2,292 $ (11,464)
========= ======== ======== ====== ======== ==========
Net income per share (5) $ 0.11
========
Pro forma (loss) per share (6) $ (0.63)
==========
</TABLE>
19
<PAGE>
April 30, 1996
--------------------------
As Adjusted
Actual (7)
-------- --------------
(Unaudited) (Unaudited)
Balance Sheet Data:
Cash and cash equivalents $ 34,142 $117,682
Working capital 39,872 129,105
Total assets 174,420 261,460
Long-term debt, less current maturities 20,166 12,899
Convertible Subordinated Debentures -- 100,000
Total shareholders' equity 129,511 129,511
(1) The Company was incorporated in October 1995 to combine the business
operations of certain companies (the "Related Companies") controlled by
Abraham D. Gosman, the Company's Chairman, President and Chief Executive
Officer. See Note 3 of Notes to Combined Financial Statements of the
Company. The business operations of the Related Companies were acquired
from third parties in transactions completed between September 1994 and
January 1996. Simultaneously with the closing of the Company's initial
public offering on January 23, 1996, the Related Companies were
transferred to the Company in exchange for 13,307,450 shares of Company
Common Stock (the "Formation"). The historical combined (representing
periods prior to the Formation) or consolidated financial data represents
the combined or consolidated financial position and results of operations
of the Company and the Related Companies for the periods presented, in
each case from the respective dates of acquisition. Each of the
Acquisitions (as defined herein), except where noted, was accounted for
under the purchase method of accounting.
(2) Gives effect to (i) those Acquisitions which were completed as of January
31, 1996, (ii) the sale of the Common Stock offered in the Company's
January 1996 initial public offering and the application of the net
proceeds therefrom, and (iii) the issuance of the Debentures in the Debt
Offering and the application of the net proceeds, therefrom as if all
such transactions had occurred as of January 1, 1995. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
-- Acquisition Summary." Adjustments have been made as required to each
of the entities' historical results of operations to give effect to the
completion of such Acquisitions, the initial public offering and the Debt
Offering. See "Unaudited Pro Forma Combined Financial Information."
(3) In January 1996, the Company changed its fiscal year end from December 31
to January 31.
(4) Provisions for income taxes have not been reflected in the combined
financial statements because there is no taxable income on a combined
basis.
(5) Net income per share is calculated based upon 21,529,950 total shares
outstanding.
(6) Pro forma loss per share has been calculated based upon 18,074,117 shares
outstanding which was derived as follows: (i) total shares outstanding
prior to the Company's January 1996 initial public offering of 13,307,450
shares (which includes pro forma total shares outstanding at December 31,
1995 of 11,207,450 shares plus 266,666 shares issued for the purchase of
the Nutrichem, Inc. minority interest plus 1,833,334 shares issued in the
Formation to certain stockholders of DASCO), plus (ii) shares of
4,766,667 from which the initial public offering proceeds were used to
repay debt and amounts due to shareholder in the amount of $71,500.
(7) Adjusted to give effect to the sale of the Debentures offered in the Debt
Offering and the application of the net proceeds therefrom.
20
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Combined Statement of Operations for the
year ended December 31, 1995 has been prepared to reflect those Acquisitions
that were completed as of January 31, 1996 as if they had been completed on
January 1, 1995. Adjustments have been made as required to each of the
entities' historical results of operations to give effect to the completion
of the Acquisitions. The Unaudited Pro Forma Combined Statement of Operations
for the year ended December 31, 1995 give effect to both the Company's
January 1996 initial public offering and the Debt Offering and the
application of the net proceeds therefrom, as if such transactions had
occurred as of January 1, 1995. The Unaudited Pro Forma Consolidated Balance
Sheet at April 30, 1996 gives effect to the Debt Offering and the application
of net proceeds therefrom as if the offering had occurred on April 30, 1996.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
The Unaudited Pro Forma Combined Financial Information has been prepared by
the Company based on the audited financial statements of certain of the
Acquisitions, which statements are included elsewhere in this Prospectus, and
the unaudited financial statements of other Acquisitions, which statements
are not included herein (as they are not significant), adjusted where
necessary, with respect to pre-acquisition periods, to the basis of
accounting used in the Company's Audited Financial Statements. The Unaudited
Pro Forma Combined Financial Information is not indicative of the results
that would have occurred if the transactions had occurred on the dates
indicated or which may be realized in the future. The Unaudited Pro Forma
Combined Financial Information should be read in conjunction with the
historical financial statements of the companies acquired in connection with
the Acquisitions and the notes thereto included elsewhere in this Prospectus.
21
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
April 30, 1996
(In thousands)
Pro Forma
As Adjusted
Historical Offering April 30,
(A) Adjustments Reference 1996
-------- ---------- ---------- -----------
Assets
Cash and cash (B), (C),
equivalents $ 34,142 $ 83,540 (D) $117,682
Receivables
Accounts receivable, net 24,447 -- 24,447
Other receivables 180 -- 180
Notes receivable -- -- --
Prepaid assets and other
current assets 1,987 -- 1,987
-------- ---------- ----------
Total current assets 60,756 83,540 144,296
-------- ---------- ----------
Property, plant and
equipment, net 39,088 -- 39,088
Notes receivable 100 -- 100
Goodwill, net 47,006 -- 47,006
Management services
agreements, net 16,575 -- 16,575
Investments in
affiliates 3,272 -- 3,272
Other assets 7,623 3,500 (B) 11,123
-------- ---------- ----------
Total assets $174,420 $ 87,040 $261,460
======== ========== ==========
Liabilities
Accounts payable 4,293 -- 4,293
Current portion of debt
and capital leases 2,334 (317) (C) 2,017
Current portion of
related party debt 2,435 -- 2,435
Due to shareholder,
current 5,376 (5,376) (D) --
Accrued compensation 824 -- 824
Other accrued
liabilities 5,393 -- 5,393
Accrued interest --
shareholder 229 -- 229
-------- ---------- ----------
Total current
liabilities 20,884 (5,693) 15,191
-------- ---------- ----------
Due to shareholder 6,311 (6,311) (D) --
Long term debt, less
current maturities 13,855 (956) (C) 12,899
Convertible Subordinated
Debentures -- 100,000 (B) 100,000
Other long term
liabilities 2,128 -- 2,128
Minority interest 1,731 -- 1,731
-------- --------- ----------
Total liabilities 44,909 87,040 131,949
-------- --------- ----------
Shareholders' Equity
Common stock 215 -- 215
Additional paid-in
capital 140,502 -- 140,502
Retained earnings (11,206) -- (11,206)
-------- --------- -----------
Total shareholders'
equity 129,511 -- 129,511
-------- --------- ----------
Total liabilities &
shareholders'
equity $ 174,420 $ 87,040 $261,460
======== ========= ==========
See accompanying notes to Unaudited Pro Forma Consolidated Balance Sheet.
22
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(In thousands)
(A) Represents the historical unaudited consolidated balance sheet of the
Company at April 30, 1996.
(B) Represents the issuance of the Debentures in the Debt Offering and the
proceeds therefrom, net of underwriting commissions and other expenses.
(C) Represents the repayment of $1,273 in notes payable to a bank ($317 of
which is current), collateralized by the assets of a multi-specialty
group practice.
(D) Represents the repayment of $11,687 due to shareholder ($5,376 of which
is current).
23
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
(In thousands, except share data)
<TABLE>
<CAPTION>
Historical Pro Forma
---------------------- ---------------------------------------
Financing/
PhyMatrix Acquisition Offering
Corp. Acquisitions Adjustments Adjustments
(A) (B) (B) (M) Combined
-------- ---------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues from services $ 48,360 $13,087 $ (1,425) $ -- $ 60,022
Net revenues from management
service agreements
22,373 40,984 1,731 -- 65,088
------ -------- ------- ------- -----------
Total revenue 70,733 54,071 306 -- 125,110
------ -------- ------- ------- -----------
Operating expenses:
Cost of affiliated physician
management services 9,656 14,302 10,654 -- 34,612
Salaries, wages and benefits 31,976 13,230 (1,587) -- 43,619
Professional fees 2,845 4,071 (2,267) -- 4,649
Supplies 11,864 7,175 (1,061) -- 17,978
Utilities 1,308 436 (166) -- 1,578
Depreciation and amortization 3,863 1,681 1,068 -- 6,612
Rent 4,503 3,344 (1,768) -- 6,079
Earn out payment 1,271 -- (1,271) -- --
Provision for closure loss 2,500 -- -- -- 2,500
Other 6,883 6,249 (1,927) -- 11,205
------ -------- ------- ------- -----------
76,669 50,488 1,675 -- 128,832
------ -------- ------- ------- -----------
Income (loss) from operations (5,936) 3,583 (1,369) -- (3,722)
------ -------- ------- ------- -----------
Interest (income) expense, net 4,852 141 (4,993) 8,433 8,433
Minority interest 806 -- (806) -- --
Other nonoperating (revenue)
expenses -- (231) 187 -- (44)
Income from investments in
affiliates (569) -- (78) -- (647)
------ -------- ------- ------- -----------
Net income (loss) (N) $(11,025) $ 3,673 $ 4,321 $(8,433) $ (11,464)
====== ======== ======= ======= ===========
Pro forma net loss per share $ (0.63)
===========
Number of shares used in pro forma
net loss per share 18,074,117(Q)
===========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined
Statement of Operations.
24
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS--SUPPLEMENTAL SCHEDULE
Summary of Acquisitions (C)
For the Year Ended December 31, 1995
(In thousands)
<TABLE>
<CAPTION>
Oncology-
Hematology
Associates,
P.A. and
Whittle DASCO Oncology-
Aegis Varnell Development Hematology
Health and Corporation Georgia Infusion Osler
Systems, Bedoya, and Cancer Therapy, Medical,
Inc. P.A. Affiliates Specialists Inc. Inc.
---- --------- ------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues from services $719 $ -- $3,629 $ -- $ -- $ --
Net revenues from management
service agreements -- 2,201 -- 10,910 2,404 9,031
-- ------- ----- ------ -------- ----
Total revenue 719 2,201 3,629 10,910 2,404 9,031
-- ------- ----- ------ -------- ----
Operating expenses:
Cost of affiliated physician
management services -- 1,211 -- 3,465 580 3,923
Salaries, wages and benefits 230 440 2,815 878 537 1,932
Professional fees 18 36 217 1,589 -- 168
Supplies 70 29 -- 3,158 628 493
Utilities 9 27 -- 18 -- 18
Depreciation and amortization 70 -- 12 113 25 214
Rent 37 59 166 749 113 730
Other 165 238 249 1,123 157 669
-- ------- ----- ------ -------- ----
599 2,040 3,459 11,093 2,040 8,147
-- ------- ----- ------ -------- ----
Income (loss) from operations 120 161 170 (183) 364 884
-- ------- ----- ------ -------- ----
Interest (income) expense,
net 26 8 (6) 42 18 79
Minority interest -- -- -- -- -- --
Other nonoperating (revenue)
expenses -- -- -- (25) (23) (3)
Income from investments
in affiliates -- -- -- -- -- --
-- ------- ----- ------ -------- ----
Net income (loss) $ 94 $ 153 $ 176 $ (200) $ 369 $ 808
== ======= ===== ====== ======== ====
</TABLE>
<TABLE>
<CAPTION>
Oncology Radiation
and Care,
Radiation Inc. All
Associates, and Other Total
Pinnacle Inc. Subsidiaries (R) Acquisitions
----- ------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues from services $1,353 $ -- $ 5,279 $2,107 $13,087
Net revenues from management
service agreements -- 10,858 -- 5,580 40,984
--- ----------- ------- --------- ---------
Total revenue 1,353 10,858 5,279 7,687 54,071
--- ----------- ------- --------- ---------
Operating expenses:
Cost of affiliated physician
management services -- 3,275 -- 1,848 14,302
Salaries, wages and benefits 640 1,326 2,597 1,835 13,230
Professional fees 8 1,825 87 123 4,071
Supplies 490 1,014 228 1,065 7,175
Utilities 57 76 100 131 436
Depreciation and amortization 29 (63) 1,195 86 1,681
Rent 91 287 512 600 3,344
Other 185 897 2,019 547 6,249
--- ----------- ------- --------- ---------
1,500 8,637 6,738 6,235 50,488
--- ----------- ------- --------- ---------
Income (loss) from operations (147) 2,221 (1,459) 1,452 3,583
--- ----------- ------- --------- ---------
Interest (income) expense,
net 42 15 (72) (11) 141
Minority interest -- -- -- -- --
Other nonoperating (revenue)
expenses (108) -- (48) (24) (231)
Income from investments
in affiliates -- -- -- -- --
--- ----------- ------- --------- ---------
Net income (loss) $ (81) $ 2,206 $(1,339) $1,487 $ 3,673
=== =========== ======= ========= =========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined
Statement of Operations.
25
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATION--SUPPLEMENTAL SCHEDULE
Summary of Adjustments For Acquisitions (D)
For the Year Ended December 31, 1995
(In thousands)
<TABLE>
<CAPTION>
Oncology-
Hematology
Associates,
DASCO P.A. and
Whittle Development Oncology-
Aegis Varnell Corporation Hematology
Uromed Health and and Georgia Infusion
Technologies Systems, Bedoya, Affiliate Cancer Therapy,
Inc. Inc. Inc. (P) Specialists Inc.
----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues from services $ -- $ -- $ -- $ -- $ -- $ --
Net revenues from management
service agreements -- -- -- -- 1,731 (K) --
--------- --------- --------- --------- --------- -----------
Total revenue -- -- -- -- 1,731 --
--------- --------- --------- --------- --------- -----------
Operating expenses:
Cost of affiliated physician
management services (F) -- -- 308 -- 2,480 457
Salaries, wages and benefits -- -- -- -- -- --
Professional fees -- -- -- -- (439) --
Supplies -- -- -- -- -- --
Utilities -- -- -- -- -- --
Depreciation and amortization (L) (3) 71 43 240 323 11
Rent (H) -- -- -- -- (291) --
Earnout payment (O) -- -- -- -- -- --
Other (H) -- (167) (J) -- -- 165 --
--------- --------- --------- --------- --------- -----------
(3) (96) 351 240 2,238 468
--------- --------- --------- --------- --------- -----------
Income (loss) from operations 3 96 (351) (240) (507) (468)
--------- --------- --------- --------- --------- -----------
Interest (income) expense, net 47 (206) (8) (165) (19) (18)
Minority interest (I) (149) -- -- -- -- --
Other nonoperating (revenue)
expense -- -- -- -- 25 --
Income from investments
in affiliates -- -- -- (78) (P) -- --
--------- --------- --------- --------- --------- -----------
$105 $ 302 $(343) $ 3 $ (513) $(450)
========= ========= ========= ========= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Radiation
Oncology Care,
Osler Radiation Inc. Total
Nutrichem, Medical, Associates, and All Acquisition
Inc. Inc. Pinnacle P.A. Subsidiaries Other (R) Adjustments
--------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues from services $ -- $ -- $ -- $ -- $ (1,425)(E) $ -- $ (1,425)
Net revenues from management
service agreements -- -- -- -- -- -- 1,731
------- ------- ------- ------- ------- ------- ---------
Total revenue -- -- -- -- (1,425) -- 306
------- ------- ------- ------- ------- ------- ---------
Operating expenses:
Cost of affiliated physician
management services (F) -- 1,044 -- 5,253 -- 1,112 10,654
Salaries, wages and benefits -- 38 504 (1,326) (F) (1,509) (E) 706 (1,587)
Professional fees -- -- -- (1,825) (F) (3)(E) -- (2,267)
Supplies -- -- -- (1,014) (F) (47) (E) -- (1,061)
Utilities -- -- -- (76) (F) (90) (E) -- (166)
Depreciation and amortization (L) 182 276 (14) 402 (735) 272 1,068
Rent (H) -- (488) -- (287) (562) (E) (140) (1,768)
Earnout payment (O) (1,271) -- -- -- -- -- (1,271)
Other (H) -- -- -- (897) (F) (1,444) (E) 416 (1,927)
------- ------- ------- ------- ------- ------- ---------
(1,089) 870 490 230 (4,390) 2,366 1,675
------- ------- ------- ------- ------- ------- ---------
Income (loss) from operations 1,089 (870) (490) (230) 2,965 (2,366) (1,369)
------- ------- ------- ------- ------- ------- ---------
Interest (income) expense, net (395) (282) (56) (160) (1,532) (2,199) (4,993)
Minority interest (I) (657) -- -- -- -- -- (806)
Other nonoperating (revenue)
expense -- 2 108 -- 48 (E) 4 187
Income from investments
in affiliates -- -- -- -- -- -- (78)
------- ------- ------- ------- ------- ------- ---------
$2,141 $ (590) $(542) $ (70) $ 4,449 $ (171) $ 4,321
======= ======= ======= ======= ======= ======= =========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined
Statement of Operations.
26
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(Dollars in thousands)
A. Represents the audited historical combined statement of operations of the
Company for the year ended December 31, 1995.
B. Represents the historical combined statement of operations of the
Acquisitions from January 1, 1995 until the earlier of the date such
Acquisitions were completed by the Company or December 31, 1995. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Acquisition Summary" for a summary of the Acquisitions.
C. Represents the historical statement of operations of each of the
Acquisitions from January 1, 1995 until the earlier of the date such
Acquisitions were completed by the Company or December 31, 1995. In the
case of Georgia Cancer Specialists, the historical statement of operations
includes Georgia Oncology-Hematology Clinic, P.C. and Cancer Specialists
of Georgia, P.C., as the two entities merged to form Georgia Cancer
Specialists. All Other represents Acquisitions which are not significant
to the Unaudited Pro Forma Combined Statement of Operations. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Acquisition Summary" for a summary of the Acquisitions.
D. Represents the adjustments to the historical statement of operations for
each of the Acquisitions from January 1, 1995 until the earlier of the
date such Acquisitions were completed by the Company or December 31, 1995.
All Other represents Acquisitions which are not significant to the
Unaudited Pro Forma Combined Statement of Operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
-- Acquisition Summary" for a summary of the Acquisitions.
E. During March 1995, the Company purchased the stock of Oncology Therapies,
Inc. ("OTI") which owns and operates outpatient radiation therapy centers
utilized in the treatment of cancer and diagnostic imaging centers. The
unaudited pro forma adjustments related to this purchase are as follows:
1. The Company closed five of the radiation therapy centers. The
unaudited pro forma adjustments include the elimination of the results
of operations for these closed centers. The following unaudited pro
forma adjustments exclude the elimination of depreciation (which
amounted to $1,140 for the year ended December 31, 1995). See Note L,
as it relates to the unaudited pro forma adjustments for depreciation
for OTI on a consolidated basis.
Year Ended
December 31, 1995
(In thousands)
Net revenues from services $ 1,425
Operating Expenses
Salaries, wages and
benefits 1,509
Professional fees 3
Supplies 47
Utilities 90
Rent 562
Other 290
--------
2,501
--------
Net loss $(1,076)
========
2. The unaudited pro forma adjustments also include the elimination of
the following non-recurring income and expenses as follows:
27
<PAGE>
Year Ended
December 31,
----------------
1995
(In thousands)
Merger transaction expenses $1,106
F. Adjusts costs of affiliated physician services to the percentage or amount
specified in each of the management services agreements.
G. Adjusts employed physicians salaries (included in all other) to the amount
as specified per the employment agreements entered into as a result of the
Acquisitions. Such changes in salary are supported by the employment
contracts.
Increases salaries, wages and benefits by $504 for the year ended December
1995 to reflect employment agreements entered into during October 1995 in
conjunction with the acquisitions of Pinnacle.
H. Adjusts for rent and other expenses based on the terms of the agreements.
I. Eliminates minority interest expense as shown below for the year ended
December 31, 1995 related to Uromed and Nutrichem. Such minority
stockholders have or will be exchanging their shares for shares in the
Company.
Year Ended
December 31,
----------------
1995
(In thousands)
Nutrichem $657
Uromed 149
--------
Total $806
========
J. Eliminates $167 of Other expenses for the year ended December 31, 1995
reflected on the financial statements of Aegis prior to the purchase by
the Company. The financial statements of Aegis reflect expenses related to
another business operated by Aegis which was not purchased by the Company.
Therefore, since such expenses were not related to the operations of the
assets purchased by the Company, they were eliminated.
K. Increases revenue for the year ended December 31, 1995 by $1,731 to
reflect the terms of an amended management services agreement which now
requires the Company to purchase the revenues of a practice that the
Company began managing in April 1995. Such amended management services
agreement was the result of a merger between a medical oncology practice
managed by the Company starting in April 1995 and a medical oncology
practice which began to be managed by the Company during August 1995.
L. Adjusts depreciation and amortization expense to properly reflect the
allocation of the purchase price as required per purchase accounting for
each of the Acquisitions.
Amounts allocated to intangibles (Goodwill and Management Service
Agreements) as of April 30, 1996 and the related amortization expense on a
pro forma basis for each of the Acquisitions is as follows:
<TABLE>
<CAPTION>
Amounts Allocated
to Intangibles
--------------------
Management Twelve Amortization
Service Months Period
Business Acquired Goodwill Agreements Amortization (Years)
- ---------------------------------------- -------- --------- ----------- ------------
(In thousands)
<S> <C> <C> <C> <C>
Recent Acquisitions
Employed physicians (1) $2,833 -- $142 20
Medical support service companies:
(bullet) Phylab/Miramer Lab 116 -- 6 20
(bullet) Pinnacle Associates, Inc. 432 -- 11 40
28
<PAGE>
(bullet) Aegis Health Systems, Inc. $6,227 -- $311 20
(bullet) Lithotripsy America, Inc. 3 -- -- 20
(bullet) Radiation Care, Inc. and
Subsidiaries 8,623 -- 216 40
(bullet) First Choice Home Care
Services of Boca Raton, Inc. 2,622 -- 131 20
First Choice Health Care Services of
Ft. Lauderdale, Inc.
First Choice Home Care Services Inc.
(bullet) Nutrichem, Inc. 9,800 -- 245 40
(bullet) Uromed Technologies, Inc. 2,376 -- 119 20
Managed physician practices
(bullet) Symington -- 30 3 10
(bullet) Venkat Mani -- 141 14 10
(bullet) Whittle, Varnell & Bedoya,
Inc. -- 289 14 20
(bullet) West Shore Urology -- 24 1 20
(bullet) Oncology Care Associates -- 47 2 20
(bullet) Oncology & Radiation
Associates, P.A. -- 9,579 479 20
(bullet) Osler Medical, Inc. -- 3,373 169 20
(bullet) Georgia Cancer Specialists -- 3,348 335 10
(bullet) Oncology-Hematology
Associates, P.A. and
Oncology-Hematology Infusion
Therapy, Inc. -- 313 21 15
Management Services Organization
(bullet) Physicians Choice Management,
LLC 3,016 -- 151 20
Medical facility development
(bullet) DASCO Development Corporation
and Affiliate ("DASCO") 9,756 -- 244 40
------- --------- -----------
Total Acquisitions $45,804 $17,144 $2,614
======= ========= ===========
</TABLE>
(1)Includes Drs. Bansal, Mistry, Dandiya, Canasi, Alpert, Hunter, Jaffer,
Cano, Herman and Novoa.
Amount recorded as fixed assets and the related depreciation expense on a
Pro Forma basis for each of the Acquisitions is as follows:
Twelve
Fixed Assets Month Depreciable
Business Acquired Acquired Depreciation Life
------------------------------- ------------- ----------- -----------
(In thousands)
Acquisitions
Employed Physicians (1) $ 605 $ 86 7
Medical Support Service
Companies:
(bullet) Phylab 18 3 7
(bullet) Pinnacle Associates, Inc. 70 10 7
(bullet) Aegis Health Systems, Inc. 705 101 7
(bullet) Lithotripsy America, Inc. 295 42 7
(bullet) Radiation Care, Inc.
and Subsidiaries 23,000(2) 2,230 Various
29
<PAGE>
(bullet) First Choice Home
Care Services of Boca
Raton, Inc. $ 28 $ 4 7
First Choice Health Care
Services of Ft. Lauderdale,
Inc.
First Choice Health Care
Services, Inc.
(bullet) Nutrichem, Inc. 173 25 7
(bullet) Uromed Technologies,
Inc. 1,400 200 7
Managed Physicians Practices:
(bullet) Symington 17 3 7
(bullet) Venkat Mani 50 7 7
(bullet) Whittle, Varnell and
Bedoya, P.A. 253 36 7
(bullet) Oncology Care
Associates 156 22 7
(bullet) West Shore Urology 1,853 145 (3)
(bullet) Osler Medical, Inc. 7,452 481 (4)
(bullet) Cancer Specialists of
Georgia, Inc. 1,561 223 7
(bullet) Oncology-Hematology
Associates, P.A. and
Oncology-Hematology
Infusion Therapy,
Inc. 281 40 7
(bullet) Georgia
Oncology-Hematology
Clinic, P.C. 631 90 7
Medical Facility Development
(bullet) DASCO 45 6 7
----------- ---------
Total Acquisitions $38,593 $3,754
=========== =========
(1) Includes Drs. Bansal, Mistry, Dandiya, Canasi, Alpert, Hunter, Jaffer,
Cano, Herman, Novoa, and Lawler.
(2) Excludes equipment written off at the closed centers.
(3) Capital leases of $1,569 are being depreciated over 15 years, which
represents the terms of the lease, all other fixed assets are being
depreciated over 7 years.
(4) A capital lease of $6,283 is being depreciated over 20 years, which
represents the term of the lease, all other fixed assets are being
depreciated over 7 years.
M. The following table represents pro forma interest expense based on the
debt outstanding on the Unaudited Balance Sheet at April 30, 1996. The
Unaudited Pro Forma Statement of Operations reflects interest expense,
based on the $117,351,777 of outstanding debt, of which $8,433,449 for the
year ended December 31, 1995 is related to the debt outstanding after the
Debt Offering.
30
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Pro Forma
----------- -------------
Year Ended Year Ended
December December
31, 31,
April 30, 1995 Pro Forma 1995
1996 (1) Interest (2) Interest
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Notes payable due to four individuals
payable in eight equal semi-annual
installments of $28,125, including
interest at 8% through November
1998. $ 140,634 $ 11,251 $ 140,634 $ 11,251
Note payable to a bank collateralized
by the assets of a multi-specialty
group practice, payable in monthly
installments of $14,027, including
interest at 7.50% and a final
payment in February 1999. 354,337 26,575 -- --
Notes payable assumed in conjunction
with the acquisition of Pinnacle
with interest rates ranging from 6%
to 10%. 731,422 57,042 731,422 57,042
Notes payable to a bank
collateralized by the assets of a
multi-specialty group practice,
payable in monthly installments of
$20,608, at 8.75% and a final
payment in August 2000. 918,779 80,393 -- --
Notes payable to the shareholders of
DASCO, payable in May 1996,
including interest at 6.37%. 2,305,294 146,847 2,305,294 146,847
Note payable to the former
shareholders of a medical oncology
practice in South Florida, payable
in ten equal semi-annual
installments of $682,867, including
interest at 9%. The note payable is
collateralized by an irrevocable
letter of credit. 4,963,687 446,732 4,963,687 446,732
Note payable to Mr. Gosman with a
maturity date of January 1998 and
an interest rate at the prime rate. 11,686,882 1,051,819 -- --
Convertible Subordinated Debentures,
due 2003 with interest due
semi-annually at 6.75%. -- -- 100,000,000 6,750,000
Capital lease obligations with
maturity dates through September
2015 and interest rates ranging
from 8.75% to 12%. 9,210,740 1,021,577 9,210,740 1,021,577
--------- --------- --------- -----------
$30,311,775 $2,842,236 $117,351,777 $8,433,449
========= ========= ========= ===========
</TABLE>
31
<PAGE>
(1) Includes actual debt at April 30, 1996.
(2) Adjusted to give effect to the Debt Offering and the application of
the net proceeds therefrom.
N. No income tax provision is required due to the Company's tax losses and
the inability of the Company to use the benefits which primarily accrued
to Mr. Gosman.
O. Adjusts to eliminate the expenses recorded during the year ended December
31, 1995 on the Nutrichem contingent note. These expenses relate to a
bonus based on earnings and continued employment. This represents the
maximum amount that can be earned because the earnings threshold upon
which the payment is based was reached at December 31, 1995.
P. Adjusts for income from investment in affiliates as follows:
Year Ended
December 31,
1995
----------------
(In thousands)
DASCO (Purchased 50% interest in May 1995) $(78)
---------------
Q. Pro forma loss per share has been calculated based upon 18,074,117 shares
outstanding which was derived as follows: total shares outstanding prior
to offering of 13,307,450 plus shares of 4,766,667 from which the proceeds
of such shares were used to repay debt and amounts due to shareholder in
the amount of $71,500.
R. "All Other" for Acquisitions represents those entities which individually
are not material to the Unaudited Pro Forma Combined Statement of
Operations. A summary of these entities with the respective historical
revenues, historical net income (loss), adjustments to revenue and
adjustments to net income (loss) are as follows:
Acquisitions
Year Ended December 31, 1995
---------------------------------------------------
(In thousands)
Historical Pro Forma Pro Forma
Net Adjustments Adjustments to
Historical Income to Net Income
Entity Revenues (Loss) Revenue (Loss)
- ------------------------ -------- -------- --------- --------------
West Shore Urology $2,035 $ 275 $-- $ (340)
Oncology Care Associates 2,438 157 -- (148)
Venkat Mani 767 455 -- (485)
Symington 340 23 -- (60)
Novoa 306 26 -- (73)
Jaffer 257 125 -- (180)
Hunter 245 1 -- (16)
Herman 181 131 -- (131)
Dandiya 126 45 -- (15)
Cano 221 (9) -- (60)
Canasi 169 75 -- (59)
Bansal & Mistry 316 185 -- (150)
Phylab -- -- -- (6)
Lithotripsy America, Inc. -- -- -- (21)
Alpert 286 (2) -- (40)
Physicians Choice
Management, LLC -- -- -- (151)
Corporate Overhead -- -- -- 1,764
-------- -------- --------- -------------
Total $7,687 $1,487 $-- $ (171)
======== ======== ========= =============
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The Company is a physician practice management company that provides
management services to disease specialty and primary care physicians and
provides related medical support services. The Company's strategy is to develop
networks of disease specialty and primary care physicians supported by related
diagnostic and therapeutic medical support services in order to provide a
continuum of health care services in specific geographic locations. To date, the
Company has focused on disease management primarily in the area of cancer care.
The Company also provides medical facility development services to related and
unrelated third parties in connection with the establishment of health parks,
medical malls and medical office buildings.
Since the Company commenced operations in June 1994, it has developed
its current business primarily through the acquisition of the businesses and
assets of physician practices and medical support service companies. As of April
30, 1996, the Company had affiliated with 104 physicians, acquired several
medical support service companies, acquired a medical facility development
company and acquired a 43.75% interest in a management services organization in
Connecticut and a 50% interest in a management services organization in Georgia
that provide management services to independent physician associations composed
of over 375 multi-specialty physicians (collectively, the "Acquisitions").
In January 1996, the Company changed its fiscal year end from
December 31 to January 31.
Acquisition Summary
The following table sets forth the acquisitions made by the Company
as of April 30, 1996 with the respective purchase dates, purchase prices, and
amounts allocated to intangibles:
<TABLE>
<CAPTION>
Amounts Allocated
to Intangibles
Management
Purchase Service
Business Acquired Date Purchased Price Goodwill Contracts
<S> <C> <C> <C> <C>
Employed physicians (A)...................... Various through $ 5,528,611 $4,416,390 $ --
April 1996
Medical support service companies:
(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 --
First Choice Health Care Services
of Ft. Lauderdale, Inc.
First Choice Health Care
Services, Inc.
(bullet) Mobile Lithotripter
of Indiana Partners December 1994 2,663,085 -- --
(bullet) Radiation Care, Inc.
and Subsidiaries March 1995 41,470,207 8,623,236 --
(bullet) Aegis Health Systems, Inc. April 1995 7,162,375 6,227,375 --
(bullet) Phylab/Miramer Lab October 1995 130,653 116,221 --
(bullet) Pinnacle Associates, Inc. November 1995 --(B) 432,339 --
33
<PAGE>
Managed physician practices:
(bullet) Georgia Oncology-Hematology Clinic,
P.C. April 1995 2,099,353 -- 645,448
(bullet) Oncology-Hematology Associates P.A.
and Oncology-Hematology Infusion
Therapy, Inc. July 1995 1,541,523 -- 312,740
(bullet) Cancer Specialists of Georgia, Inc. August 1995 6,064,950 -- 2,702,887
(bullet) Oncology & Radiation Associates, P.A. September 1995 10,784,648 -- 9,579,424
(bullet) Osler Medical, Inc. September 1995 5,792,876 -- 3,373,741
(bullet) West Shore Urology October 1995 550,859 -- 23,616
(bullet) Whittle, Varnell and Bedoya, P.A. November 1995 984,711 -- 288,564
(bullet) Oncology Care Associates November 1995 532,232 -- 47,179
(bullet) Symington December 1995 121,667 -- 29,566
(bullet) Venkat Mani December 1995 443,429 -- 140,839
Medical facility development:
(bullet) DASCO Development Corporation
and Affiliate May 1995/
January 1996 9,755,568(C) 9,755,568 --
Management Services Organization:
(bullet) Physicians Choice Management, LLC December 1995 3,850,000 3,015,928
(bullet) Central Georgia Medical
Management, LLC April 1996 1,250,000 900,000 --
</TABLE>
(A) Includes Drs. Bansal, Mistry, Dandiya, Canasi, Alpert, Hunter, Jaffer,
Cano, Herman, Barza, Novoa and Lawler.
(B) Entire purchase price is contingent and is based on earnings with a maximum
purchase price of $5.2 million.
(C) The Company acquired 50% of DASCO in May 1995 and the remaining 50% was
acquired simultaneous with the initial public offering in January 1996.
See Medical Facility Development Acquisitions.
Physician Practice Acquisitions
During the year ended December 31, 1995, the Company purchased the
assets of Drs. Bansal, Mistry, Dandiya, Canasi, Alpert, Hunter, Jaffer, Cano,
Herman, Barza and Novoa and in conjunction with those purchases entered into
employment agreements with 14 physicians in Florida. The total purchase price
for these assets was $3,896,912. The purchase price was allocated to these
assets at their fair market value, including goodwill of $2,834,411. During the
quarter ended April 30, 1996, the Company purchased the assets of and entered
into an employment agreement with Dr. Lawler. The total purchase price for these
assets was $1,631,699 and was allocated to the assets at their fair market value
including goodwill of $1,581,979. The resulting goodwill is being amortized over
20 years.
During July 1995, the Company purchased the assets of and entered
into a 15-year management agreement with Oncology-Hematology Associates, P.A.
and Oncology-Hematology Infusion Therapy, Inc. a medical oncology practice in
Baltimore, Maryland with three medical oncologists. The purchase price for these
assets was approximately $1,541,523 in cash. An affiliate of the Company
guarantees the performance of the Company's obligations under the management
agreement. For its management services, the Company will receive 41.6% of the
net revenues of the practice less the salaries and benefits of medical personnel
whose services are billed incident
34
<PAGE>
to the practice of medicine and which are employed by the practice. The Company
has guaranteed that the minimum amount that will be retained by the practice for
each of the first eight years will be $1,627,029 and for each of years nine and
ten will be $1,301,619. The purchase price was allocated to the assets at their
fair market value, including management service agreements of approximately
$312,740. The resulting intangible is being amortized over 15 years.
During August 1995, the Company purchased the assets of Cancer
Specialists of Georgia, Inc. a medical oncology practice with 11 oncologists in
Atlanta, Georgia. The purchase price for these assets was approximately
$6,064,950 in cash. In addition, during April 1995, the Company purchased the
assets of and entered into a 10-year management agreement with Georgia
Oncology-Hematology Clinic, P.C. a medical oncology practice with eight
oncologists in Atlanta, Georgia. The purchase price for these assets was
approximately $2,099,353 in cash. During August 1995, these two medical oncology
practices consolidated and formed a new entity, Georgia Cancer Specialists, Inc.
The Company entered into a new 10-year management agreement with the
consolidated practice during August 1995. For its services under this management
agreement, the Company receives 41.5% of the net practice revenues less the cost
of pharmaceutical and/or ancillary products. In each of the second through fifth
years of the term of this agreement, the fee payable to the Company is decreased
by 1%. The Company also purchased for $180,000 a 46% interest in I Systems,
Inc., a company affiliated with one of the practices which is engaged in the
business of claims processing and related services. The purchase of this 46%
interest is being accounted for by the equity method. The Company has the option
to purchase up to an additional 30% interest in the affiliated Company for
$33,333 in cash for each additional one percent of ownership interest purchased.
The Company and the affiliated company entered into a three-year service
agreement pursuant to which certain billing and collection services will be
provided to the Company. The purchase price of the above acquisitions was
allocated to the assets at their fair market value, including management service
agreements of $3,348,335. The resulting intangible is being amortized over 10
years.
During September 1995, the Company purchased the assets of and
entered into a 20-year management agreement with Osler Medical, Inc., a 22
physician multi-specialty group practice in Melbourne, Florida. The purchase
price for these assets was approximately $4,302,604 plus the assumption of debt
of $1,490,272. The Company also entered into a 20-year capital lease for the
main offices of the practice with a total obligation of $6,283,483. An affiliate
of the Company has provided a guarantee of such payments under the lease. During
the first five years of the management agreement, the Company will receive a
management fee equal to 45% of the annual net revenues of the practice.
Thereafter, the management fee increases to 47% of annual net revenues. The
management fee percentage for net revenues of the initial physician group will
be reduced based upon a set formula to a minimum of 31% based upon the
achievement of certain predetermined benchmarks. The management agreement also
provides that, during the period from January 1, 1996 through December 31, 2005,
to the extent annual net revenues of the practice are less than $10,838,952, the
Company's management fee is reduced up to a maximum reduction of $1,500,000 per
year. The Company has agreed to expend up to $1,500,000 per year for each of the
first three years of the management agreement to assist in the expansion
activities of the practice. The Company also has agreed that on the earlier of
the second anniversary of the Company's acquisition of the practice or 120 days
after the offering, it will acquire certain copyright and trademark interests
for a purchase price equal to the lesser of $887,000 or the fair market value
thereof. The Company acquired these copyright and trademark interests for
$887,000 during June 1996. The purchase price for the practice's assets acquired
as of April 30, 1996 was allocated to such assets at their fair market value,
including management service agreements of $3,373,741. The resulting intangible
is being amortized over 20 years.
During September 1995, the Company purchased the assets of and
entered into a 20-year management agreement with Oncology & Radiation
Associates, P.A. a medical oncology practice with 19 oncologists in South
Florida. The purchase price for these assets was $5,381,311 in cash plus the
assumption of debt of $5,403,337. The debt is collateralized by an irrevocable
letter of credit issued by NationsBank of Florida, N.A. ("NationsBank"), the
collateral for which had been provided by Mr. Gosman prior to the offering. The
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
35
<PAGE>
the first five years of the agreement and not less than $700,000 thereafter. The
variable management fee is equal to 35.5% of certain revenues, subject to
increase in certain circumstances. The purchase price for the practice's assets
was allocated to the assets at their fair market value, including management
service agreements of $9,579,424. The resulting intangible is being amortized
over 20 years.
During the fourth quarter of 1995, the Company purchased the assets
of and entered into management service agreements with West Shore Urology;
Whittle, Varnell and Bedoya, P.A.; Oncology Care Associates; Venkat Mani; and
Symington consisting of 14 physicians including two oncologists. The total
purchase price for these assets was $2,632,898 in cash. The Company also entered
into a 15-year capital lease with a total obligation of $1,569,171. The purchase
price for the practices' assets was allocated to assets at their fair market
value, including management service agreements of $529,764. The resulting
intangible is being amortized over ten to 20 years.
Medical Support Service Companies Acquisitions
During September 1994, an 80% owned subsidiary of the Company
purchased substantially all of the assets of Uromed Technologies, Inc., a
provider of lithotripsy services in Florida, for a Base Purchase Price of
$2,564,137 plus the assumption of capital lease obligations of $1,097,614. The
Final Purchase Price equals the Base Purchase Price plus the amount by which
Stockholders' Equity exceeded $450,000 on the Closing Date. A Final Purchase
Price payment of $283,000 was accrued at December 31, 1994 and paid during May
1995. The former shareholders of Uromed will also receive an earnings
contingency payment of $274,000 which has been accrued at December 31, 1995. The
acquisition was accounted for under the purchase method of accounting. The
purchase price was allocated to assets at their fair market value including
goodwill of $2,375,914. The resulting intangible is being amortized over twenty
years. The Company intends to acquire the outstanding 20% interest in the
subsidiary.
During November 1994, the Company purchased 80% of the stock of
Nutrichem, Inc. ("Nutrichem"), an infusion therapy company doing business in
Maryland, Virginia and the District of Columbia, for $3,528,704 in cash and a
contingent note in the amount of $6,666,667, subject to adjustments. During the
year ended December 31, 1995, the Company made payments on the contingent note
of $2,657,732 (including interest of $435,510). Subsequent to the offering, the
contingent note (which had an outstanding principal balance of $4,444,444 at
December 31, 1995) was paid from the net proceeds of the offering. A charge of
$1,271,000 related to this contingent note was recorded during the year ended
December 31, 1995. The remaining $5,395,667 was allocated to goodwill at
December 31, 1995 and is being amortized. The purchase price was allocated to
assets at the fair market value including total goodwill of $7,007,833. The
resulting intangible is being amortized over 40 years. Subsequent to the initial
public offering, the Company acquired the outstanding 20% interest in Nutrichem
in exchange for 266,666 shares of Common Stock resulting in additional purchase
price and goodwill of $4,000,000 and $2,791,960, respectively.
During November 1994, the Company acquired all of the assets and
assumed certain liabilities of First Choice Health Care Services of Ft.
Lauderdale, Inc., First Choice Health Care Services, Inc. and First Choice Home
Care Services of Boca Raton, Inc., home health care companies doing business in
Florida, for a total purchase price of $2,910,546 in cash. The purchase price
was allocated to assets at the fair market value, including goodwill of
$2,622,061. The resulting intangible is being amortized over 20 years.
During December 1994, the Company purchased a 36.8% partnership
interest in Mobile Lithotripter of Indiana Partners, a provider of lithotripsy
services in Indiana, from Mobile Lithotripter of Indiana, Limited, for
$2,663,085 in cash. This investment is being accounted for by the equity method.
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
36
<PAGE>
centers. OTI's centers are located in Alabama, California, Florida, Georgia,
North Carolina, South Carolina, Tennessee and Virginia. The total purchase price
for the stock (not including transaction costs and 26,800 shares subject to
appraisal rights) was approximately $41,470,207. The purchase price was paid by
a combination of cash on hand, loans from Mr. Gosman and net proceeds from long
term debt financing of approximately $17,278,000. The long term debt financing
was paid in full during January 1996 with the proceeds of the offering. The
Company closed five of OTI's radiation therapy centers and has accrued
approximately $3,134,028 primarily as a reserve for the estimated amount of the
remaining lease obligation. Of this amount $2,188,635 was recorded as an
adjustment to the purchase price and $945,393 was recorded as a charge in the
fourth quarter of 1995. In addition, the Company also recorded a charge during
the fourth quarter of 1995 of $1,554,607, which represents the writedown of
assets to their estimated fair market value. The purchase price paid in
connection with the OTI merger was allocated to assets at their fair market
value, including goodwill of $8,623,236. The resulting intangible is being
amortized over 40 years.
During April 1995, the Company purchased from Aegis Health Systems,
Inc. ("Aegis") for $7,162,375 all of the assets used in its lithotripsy services
business. The purchase price consisted of approximately $3,591,967 in cash and
$3,570,408 in a promissory note. The outstanding principal balance and any
unpaid interest became due and payable upon the closing of the offering and was
paid in full during January 1996. The obligations, evidenced by the promissory
note, were secured by $1,000,000 which was in escrow and included in other
assets at December 31, 1995. The purchase price was allocated to assets at their
fair market value including goodwill of $6,227,375. The resulting intangible is
being amortized over 20 years.
During November 1995 the Company acquired by merger Pinnacle
Associates, Inc. ("Pinnacle"), an Atlanta, Georgia infusion therapy services
company. In connection with the Pinnacle merger there is a $5,200,000 maximum
payment that may be required to be paid that is based on earnings and will be
made in the form of shares of Common Stock of the Company valued as of the
earnings measurement date. The amount of such contingent payment has not yet
been determined, however, the Company believes that the impact on the financial
statements is immaterial. The contingent consideration represents the full
purchase price. On the merger date, the liabilities assumed exceeded the fair
market value of the assets acquired by approximately $432,339 and such amount
was recorded as goodwill and is being amortized over 40 years.
Management Services Organization
During December 1995, the Company obtained a 43.75% interest in
Physicians Choice Management, LLC, a newly formed management services
organization ("MSO") that provides management services to an independent
physician association ("IPA") composed of over 330 physicians based in
Connecticut. The Company acquired this interest in exchange for a payment of
$1.0 million to existing shareholders, a payment of an additional $500,000 to
existing shareholders during the next six months (which has been included in
accrued liabilities at December 31, 1995), a capital contribution of $1.5
million to the Company and a commitment to make an additional $500,000 capital
contribution during the next six months. The Company's balance sheet as of
December 31, 1995 includes the 56.25% interest not owned by the Company as
minority interest. The Company also has an option, which expires in May 1998, to
increase its ownership in the MSO to 50% for an additional investment of $2.0
million, of which $1.0 million would represent an additional capital
contribution to the MSO and $1.0 million would represent the purchase of
additional units currently owned by the IPA. The Company has paid a
nonrefundable amount of $350,000 for such option. In addition, the owners of the
other 50% interest in the MSO have a put option to the Company to purchase their
interests. This put option vests over a four year period. The price to the
Company to purchase these interests shall equal 40% of the MSO's net operating
income as of the most recent fiscal quarter multiplied by the price earnings
ratio of the Company. In addition, upon the IPO the Company granted options to
purchase 300,000 shares of Common Stock to certain MSO employees in conjunction
with their employment agreements. These options vest over a two year period with
the exercise price equaling the fair market value of the Company's stock on the
date such shares become exercisable.
37
<PAGE>
During April 1996, the Company purchased a 50% interest in Central
Georgia Medical Management, LLC, a newly formed MSO that provides management
services to an IPA composed of 45 physicians based in Georgia. The Company
acquired this interest in exchange for a payment of $550,000 to existing
shareholders and a capital contribution of $700,000 to the MSO. The Company's
balance sheet as of April 30, 1996 includes the 50% interest not owned by the
Company as minority interest. The owners of the other 50% interest in the MSO
have a put option to the Company to purchase their interests. This put option
vests over a four year period. The price to the Company to purchase these
interests shall equal 40% of the MSO's net operating income as of the most
recent fiscal year multiplied by the price earnings ratio of the Company. The
minimum price earnings ratio used in such calculation will be four and the
maximum 10.
Medical Facility Development Acquisitions
On May 31, 1995, Mr. Gosman purchased for $9.6 million a 50%
ownership interest in DASCO, a medical facility development services company
providing such services to related and unrelated third parties in connection
with the development of medical malls, health parks and medical office
buildings. The purchase price consisted of $5.0 million in cash and $4.6 million
in notes, which are guaranteed by Mr. Gosman. Upon the closing of the initial
public offering, Messrs. Gosman, Sands and Rendina, the Company's principal
promoters, and certain management and founder stockholders exchanged their
ownership interests in DASCO for shares of Common Stock equal to a total of $55
million or 3,666,667 shares. The Company believes that its medical facility
development services and project finance strategy are a significant component of
the Company's overall business strategy. The historical book value of Messrs.
Sands and Rendina's interest in DASCO is $22,735. The initial 50% purchase price
was allocated to assets at their fair market value, primarily goodwill of $9.7
million with the exchange recorded at historical value. At December 31, 1995
DASCO was being accounted for using the equity method.
Accounting Treatment
Each of the Acquisitions was accounted for under the purchase method
of accounting, except where noted otherwise above. The audited combined
financial statements of the Company for the period June 24, 1994 through
December 31, 1994 and for the year ended December 31, 1995 have been prepared to
reflect the combination of these business entities which have operated since
their purchase date under common control. See Notes 6 and 7 of Notes to Combined
Financial Statements for information regarding the amortization of intangibles.
The Company's relationships with its affiliated physicians are set
forth in various asset purchase agreements, management service agreements, and
employment and consulting agreements. Through the asset purchase agreement, the
Company acquires the equipment, furniture, fixtures, supplies and, in certain
instances, service agreements, of a physician practice at the fair market value
of the assets. The accounts receivable are typically purchased at the net
realizable value. The purchase price of the practice generally consists of cash
and the assumption of certain debt, leases and other contracts necessary for the
operation of the practice. The management services or employment agreements
delineate the responsibilities and obligations of each party. See "Business -
Physician Affiliation."
Net revenues from management service agreements include the
contractual fees earned (which equals the net revenues generated by the
physician practices) under its management services agreements with physicians.
Under the agreements, the Company is contractually responsible and at risk for
the operating costs of the medical groups. The costs include the reimbursement
of all medical practice operating costs and the fixed and variable contractual
management fees (which are reflected as cost of affiliated physician management
services) as defined and stipulated in the agreements.
Results of Operations
Three Months Ended April 30, 1996 Compared to Three Months Ended March 31, 1995
38
<PAGE>
The following discussion reviews the results of operations for the
three months ended April 30, 1996 (the "1996 Quarter") compared to the three
months ended March 31, 1995 (the "1995 Quarter").
Revenues
The Company derives revenues from health care services and medical
facility development services. Within the health care segment, the Company
distinguishes between revenues from cancer services, non-cancer physician
services and other medical support services. Cancer services include physician
practice management services to oncology practices and certain medical support
services, including radiation therapy, diagnostic imaging and infusion therapy.
Non-cancer physician services include physician practice management services to
all practices managed by the Company other than oncology practices. Other
medical support services include home health care services and lithotripsy. Net
revenues were $6.7 million for the 1995 Quarter. Of this amount, $2.1 million or
31.6% of such revenues was attributable to cancer services; $.2 million or 3.3%
was related to non-cancer physician services, and $4.3 million or 65.1% of such
revenues was attributable to other medical support services.
Net revenues for the 1996 Quarter were $37.2 million. Such revenues
during this period consisted of $21.1 million or 56.8% related to cancer
services; $7.2 million or 19.4% related to non-cancer physician services; $5.2
million or 13.9% related to other medical support services; and $3.7 million or
9.9% related to medical facility development. As of April 30, 1996, the Company
had affiliations with 55 physicians providing cancer related services, 15
employed primary care physicians, and 34 other multigroup or specialty
physicians.
Expenses
For the 1996 Quarter and the 1995 Quarter, expressed as a percentage
of net revenues, general corporate expenses were 3.9% and 10.9%, respectively.
General corporate expenses were higher during the 1995 Quarter than the 1996
Quarter due to the recent commencement of operations of the Company.
The Company's cost of affiliated physician management services was
$8.5 million for the 1996 Quarter. There were no costs of affiliated physician
management services during the 1995 Quarter. Cost of affiliated physician
management services represents the fixed and variable contractual management
fees as defined and stipulated in the management agreements. Revenue for these
managed physician practices was $17.2 million for the 1996 Quarter.
The Company's depreciation and amortization expense was $1.6 million
for the 1996 Quarter and $.3 million for the 1995 Quarter. The increase is a
result of the acquisition of the businesses and assets of physician practices
and medical support service companies and the allocation of the purchase prices
as required per purchase accounting.
The Company's rent expense was $1.7 million for the 1996 Quarter and
$.3 million for the 1995 Quarter. Rent and lease expenses as a percentage of net
revenue will vary based on the size of each of the affiliated practice offices,
the number of satellite offices and the current market rental rate for medical
office space in the particular geographic markets.
The Company's earn-out payment during the 1995 Quarter represents a
payment to Nutrichem on the contingent note entered into in conjunction with the
acquisition of Nutrichem.
The Company's net interest expense was $.3 million for the 1996
Quarter and the 1995 Quarter. Interest income of $.5 million was earned during
the 1996 Quarter on the remaining proceeds from the Company's 1996 initial
public offering.
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No income tax provision was required during the 1995 Quarter due to
the Company's tax loss and the inability of the Company to use the benefits
which prior to the completion of the initial public offering primarily accrued
to Mr. Gosman.
Year Ended December 31, 1995 Compared to Period from June 24, 1994 to
December 31, 1994
The following discussion reviews the historical results of operations
for the year ended December 31, 1995 and the period from June 24, 1994 to
December 31, 1994. The pro forma results of operations are presented for the
years ended December 31, 1995 and 1994.
Historical and Pro Forma
The Combined Historical Audited Financial Statements and the Notes
thereto and the Unaudited Pro Forma Combined Financial Information and Notes
thereto included elsewhere in this Prospectus present the results of operations
of the entities which were operated under common control on a combined basis.
All of the entities were acquired by the Company subsequent to June 23, 1994. As
a result of the Acquisitions, the Company believes that any period to period
comparisons and percentage relationships within periods are not meaningful.
The Unaudited Pro Forma Combined Statement of Operations presents the
results of operations of the Company for the year ended December 31, 1995 as if
the Acquisitions which were completed as of January 31, 1996 and both the sale
of the Common Stock in the Company's initial public offering (at a public
offering price of $15.00 per share) and the Debt Offering and the application of
the net proceeds therefrom had been consummated on January 1, 1995. Such Pro
Forma Combined Statement of Operations is based on the historical financial
information of the Acquisitions which were completed as of January 31, 1996
adjusted to reflect the purchase price and the elimination of various
non-recurring income and expenses as further described in the Notes to the
Unaudited Pro Forma Combined Statement of Operations. Such Unaudited Pro Forma
Combined Statement of Operations does not include operational or other changes
which might have been effected by the Company's management. The Unaudited Pro
Forma Combined Statement of Operations is not necessarily indicative of the
results that would have occurred if the transactions had occurred on the dates
indicated or which may be realized in the future.
Historical Revenues
Net revenues of $2.4 million for the period from June 24, 1994 to
December 31, 1994 include revenues from the Acquisitions completed during the
period September through December 1994. Of this amount, $.7 million or 28% of
such revenues was attributable to cancer services; and $1.8 million or 72% of
such revenues was attributable to other medical support services. The Company
had no physician related revenues during this period.
Net revenues of $70.7 million for the period from January 1, 1995 to
December 31, 1995 include revenues from the Acquisitions completed during the
period June 24, 1994 to December 31, 1995. Such revenues during this period
consisted of $44.9 million or 63% related to cancer services; $7.7 million or
11% related to non-cancer physician services; and $18.1 million or 26% related
to other medical support services. As of December 31, 1995, the Company had
affiliations with 55 physicians providing cancer related services, 14 employed
primary care physicians, and 34 other multigroup or specialty physicians.
Pro Forma Revenues
The pro forma results of operations reflect the Acquisitions
including the Company's affiliation with 103 physicians and revenues from the
related medical support services.
Pro forma net revenues for the year ended December 31, 1995 include
revenues from all of the Acquisitions which were completed as of January 31,
1996 as if they had occurred on January 1, 1995. Such revenues consisted of
$78.8 million or 63% related to cancer services (of which $70.0 million or 89%
of cancer
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services revenues related to oncologists' services); $23.9 million or 19%
related to non-cancer physician services; $18.8 million or 15% related to other
medical support services; and $3.6 million or 3% related to medical facility
development services.
Historical Expenses
For the period from June 24, 1994 to December 31, 1994 and for the
year ended December 31, 1995, expressed as a percentage of net revenues, general
corporate expenses were 67% and 5%, respectively. In 1994, general corporate
expenses were relatively high due to the expenses incurred in connection with
the commencement of operations of the Company. General corporate expenses will
continue to increase in gross dollars, but this expense as a percentage of net
revenues is expected to continue to decline. No income tax provision is required
due to the Company's current tax loss and the inability of the Company to use
the benefits which prior to the completion of the initial public offering
primarily accrued to Mr. Gosman.
Pro Forma Expenses
The pro forma results of operations for the year ended December 31,
1995 included the actual general corporate expenses incurred by the Company.
General corporate expenses as a percent of net revenues were 2.8% for the year
ended December 31, 1995.
The pro forma results of operations include the cost of affiliated
physician management services which was $34.6 million for the year ended
December 31, 1995. Revenue for these managed physician practices was $65.1
million for the year ended December 31, 1995. No income tax provision is
required due to the Company's current pro forma tax loss.
The nature of the affiliated practices affects the cost of affiliated
physician management services, salaries, wages and benefits, supplies,
depreciation and amortization. These expenses as a percentage of net revenue
will vary based on the mix of physician specialties.
Rent and lease expenses as a percentage of net revenue will vary
based on the size of each of the affiliated practice offices, the number of
satellite offices and the current market rental rate for medical office space in
the particular geographic markets.
Other costs as a percentage of net revenue will vary based on the
ability of the Company to centralize these costs, negotiate more favorable
pricing and institute stronger budgeting controls.
Medical Facility Development
The Company, through its investment in DASCO, provides medical
facility development services to related and unrelated third parties in
connection with the establishment of health parks, medical malls and medical
office buildings. The Company believes that the development of such facilities,
in certain markets, will aid in the integration of its affiliated physicians and
medical support services and will provide future opportunities to affiliate with
physicians and acquire future physician practices or support services. Further,
the 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.
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The Company typically receives the following compensation for its
services: development fees (including management of land acquisition,
subdivision, zoning, surveying, site planning, permitting and building design),
general contracting management fees, leasing and marketing fees, project cost
savings income (based on the difference between total budgeted project costs and
actual costs) and consulting fees.
The amount of development fees and leasing and marketing fees are
stated in the development and marketing agreements. Those agreements also
provide the basis for payment of the fees. The financing fees and consulting
fees are generally not included in specific agreements but are negotiated and
disclosed in project pro formas provided to the owners of the buildings and
hospital clients. Specific agreements usually incorporate those pro formas and
provide that the projects will be developed in conformity therewith. General
contracting management fees and project cost savings income are included in
guaranteed maximum cost contracts entered into with the general contractor.
These contracts are usually approved by the owners which in many cases include
hospital clients and prospective tenants.
On a pro forma basis the Company's medical facility development
generated revenues of $3.6 million and pre-tax loss of $70,000 for the year
ended December 31, 1995. During the 1996 Quarter the Company's medical facility
development generated revenues of $3.7 million and pre-tax income (prior to
allocation of general corporate expenses) of $1.9 million.
Liquidity and Capital Resources
Cash used by operating activities was $.7 million for the 1996
Quarter and $2.8 million for the 1995 Quarter. During the 1995 Quarter the
Company had a loss of $2.3 million which included $.3 million of depreciation
and amortization. In addition, during the 1995 Quarter accounts receivables
increased by approximately $.8 million. During the 1996 Quarter the Company had
net income of $2.3 million which included $1.6 million of depreciation and
amortization. In addition, during the 1996 quarter accounts receivable increased
by approximately $3.2 million and accounts payables and accrued liabilities
decreased by approximately $1.1 million.
Cash used by investing activities was $3.5 million and $16.7 million
for the 1996 Quarter and 1995 Quarter, respectively. This primarily represents
the funds required by the Company for the acquisition of physician practices and
medical support service companies.
Cash used by financing activities was $7.7 million for the 1996
Quarter. During the 1996 Quarter, the Company repaid $3.0 million of debt
outstanding as well as $3.8 million of advances from shareholder. Cash provided
by financing activities was $20.2 million for the 1995 Quarter which primarily
represents the $21.5 million in capital contributions and advances from
shareholder offset by the repayment of $1.1 million in debt outstanding.
At April 30, 1996, on a pro forma basis after the completion of the
Debt Offering and the application of the net proceeds therefrom, the Company's
principal source of liquidity consisted of $117.7 million in cash. Working
capital of $129.1 million on a pro forma basis increased by $151.4 million from
December 31, 1995 to April 30, 1996 primarily as a result of (i) the $111.7
million of net proceeds received from the Company's initial public offering
offset by repayment of approximately $71.5 million of indebtedness, (ii) the
$96.5 million of net proceeds from the Debt Offering offset by the repayment of
approximately $13.0 million of indebtedness and (iii) the payment of certain
obligations arising from the Acquisitions. The Company also had $15.2 million of
current liabilities, including approximately $4.5 million of indebtedness
maturing before April 30, 1997. Further, the Company also has completed
Acquisitions subsequent to April 30, 1996 which required approximately $2.6
million in cash to complete.
During 1995, the Company entered into a management agreement with a
22-physician multi-specialty group practice pursuant to which the Company has
agreed to expend up to $1.5 million per year in each of the next three years to
assist in the expansion activities of the practice. In addition, subsequent to
April 30, 1996, the Company has acquired certain copyright and trademark
interests of the practice for $.9 million.
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The Company's acquisition and expansion programs will require
substantial capital resources. In addition, the operation of physician groups,
integrated networks and related medical support service companies, and the
development and implementation of the Company's management information systems,
will require ongoing capital expenditures. The Company expects that its capital
needs over the next several years will substantially exceed capital generated
from operations and the net proceeds of the Debt Offering. To finance its
capital needs, the Company plans both to incur indebtedness and to issue, from
time to time, additional debt or equity securities, including Common Stock or
convertible notes, in connection with its acquisitions and affiliations. The
Company currently has a $30 million commitment from a Bank to fund working
capital and acquisition financing needs.
The Company expects that the working capital, the net proceeds of the
Debt Offering and cash generated from operations and amounts available under an
acquisition/working capital line for which the Company has received a commitment
from a Bank will be adequate to satisfy the Company's cash requirements for the
next 12 months. However, there can be no assurance that the Company will not be
required to seek additional financing during this period. The failure to raise
the funds necessary to finance its future cash requirements would adversely
affect the Company's ability to pursue its strategy and could adversely affect
its results of operations for future periods.
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BUSINESS
The Company provides management services to disease specialty and
primary care physicians and related medical support services. The Company's
primary strategy is to develop disease management networks in specific
geographic locations by acquiring physician practices and affiliating with
disease specialty and primary care physicians. Where appropriate, the Company
supports its affiliated physicians with related diagnostic and therapeutic
medical support services. The Company's medical support services include
radiation therapy, diagnostic imaging, infusion therapy, home health care and
lithotripsy services. Since its first acquisition in September 1994, the Company
has acquired the practices of and affiliated with 128 physicians and acquired
eight medical support service companies and a medical facility development
company. The Company also owns a 43.75% interest in a newly formed management
services organization that provides management services to an independent
physician association composed of over 330 multi-specialty physicians and a 50%
interest in a second management services organization that provides management
services to an independent practice association composed of 45 primary care
physicians.
The Company believes that its strategy of acquiring and integrating
independent physician practices and medical support services into specialty
networks creates synergies, achieves operating efficiencies and responds to the
cost-containment initiatives of payors, particularly managed care companies. The
Company has focused its disease management efforts on the acquisition of
oncology practices. To date, the Company has acquired the practices of and
affiliated with 60 oncologists and provides comprehensive cancer-related support
services including radiation therapy, infusion therapy and diagnostic imaging.
The Company intends to develop additional disease management services for the
treatment of other chronic illnesses such as diabetes, cardiovascular diseases
and infectious diseases.
In certain targeted markets, the Company organizes its affiliated
physicians and related medical support services into integrated clusters of
disease specialty and primary care networks, which it terms local provider
networks ("LPNs"). LPNs are designed to provide a comprehensive range of
physician and medical support services within specific geographic regions. The
Company believes that its LPN structure will achieve operating efficiencies and
enhance its ability to secure contracts with managed care organizations. To
date, the Company has contracts with managed care organizations under which the
Company and its affiliated physicians provide cancer-related health care
services to over 200,000 covered lives. To date, the Company has established an
LPN in each of the Southeast Florida, Atlanta, Connecticut and Washington,
D.C./Baltimore areas.
As part of its strategy to integrate physician practices, the Company
provides medical facility development services to related and unrelated third
parties for the development of health parks, medical malls and medical office
buildings. Such services include project finance assistance, project management,
construction management, construction design engineering, physician recruitment,
leasing and marketing. While the Company incurs certain administrative and other
expenses in the course of providing such services, it does not incur costs of
construction or risks of project ownership. The Company's strategy in financing
its projects is to involve future tenants as significant investors in and owners
of the developed medical facilities. Because most of its tenants are physicians
and medical support service companies, the Company believes that the
relationships that it develops with these parties through its medical facility
development efforts will greatly enhance the Company's ability to affiliate with
physicians and acquire physician practices and medical support service
companies. Further, the Company believes that the development of health parks,
medical malls and medical office buildings in certain markets will aid in the
integration of its affiliated physicians and medical support services.
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
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care in the United States has led to numerous initiatives to contain the growth
of health care expenditures, particularly in the government entitlement programs
of Medicare and Medicaid. These concerns and initiatives have contributed to the
growth of managed care. Managed care typically involves a third party
(frequently the payor) governing the provision of health care with the objective
of ensuring delivery in a high quality and cost effective manner. One method for
achieving this objective is the implementation of capitated payment systems in
which traditional fee for service methods of compensating health care providers
are abandoned or modified in favor of systems that create incentives for the
provider to manage the health care needs of a defined population for a set fee.
Physician Practice Management
Health care in the United States historically has been delivered by a
fragmented system of health care providers, including hospitals, individual
physicians and small groups of specialist and primary care physicians. According
to industry sources, approximately 650,000 physicians are actively involved in
patient care in the United States. A 1993 American Medical Association study
estimates that there are over 86,000 physicians practicing in 3,600
multi-specialty group practices of three or more physicians and over 82,000
physicians practicing in 12,700 single specialty group practices in the United
States.
The focus on cost containment has placed many solo practices, small
to mid-sized physician groups and single specialty group practices at a
significant disadvantage because they typically have high operating costs
relative to revenue and little purchasing power with vendors of supplies. These
physician practices often lack the capital to purchase new clinical equipment
and technologies, such as information systems, necessary to enter into
sophisticated risk sharing contracts with payors. Additionally, these physicians
often do not have formal ties with other providers nor the ability to offer
coordinated care across a variety of specialties, thus reducing their
competitive position, particularly with managed care companies, relative to
larger provider organizations.
As a result of these changes in the market place, physicians are
increasingly abandoning traditional private practice in favor of affiliations
with larger organizations, such as the Company, that offer sophisticated
information systems, management expertise and capital resources. Many payors and
their intermediaries, including governmental entities and HMOs, are increasingly
looking to outside providers of physician management services to develop and
maintain quality outcome management programs and patient care data. In addition,
such payors and intermediaries look to share the risk of providing health care
services through capitation arrangements which provide for fixed payments for
patient care over a specified period of time.
Disease Management: Cancer and Other Diseases
Disease management is the comprehensive management of a patient's
medical care as it relates to the treatment of a specific chronic illness.
According to industry sources, costs (including direct health care costs and
indirect costs) associated with cancer, diabetes, cardiovascular disease and
certain infectious diseases exceeded $500 billion in 1994. Despite the current
consolidation of the health care industry, the providers of the components of
disease management services, including cancer care providers, remain highly
fragmented.
The provision of cancer care is a significant and growing market.
According to the American Cancer Society, the estimated number of cancer cases
diagnosed annually in the United States (excluding certain skin cancers)
increased from approximately 782,000 in 1980 to approximately 1.2 million in
1994, an increase of 53%. This increase is attributable to a number of factors,
including a growing and aging population. In 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
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cancer treatment centers. Cancer treatment centers may provide certain services,
including radiation therapy and infusion therapy, but they generally do not
integrate these services with the physician practice. The Company believes that
the current fragmented system for treating cancer is inefficient, costly and
inhibits effective disease management.
The Company believes that the acquisition and integration of
previously independent health care practices into a disease specialty network
provides a substantial opportunity both to derive significant synergies and
operating efficiencies and to contract with managed care companies for a full
continuum of disease specific care. The Company expects the development of such
networks and systems not only to enhance productivity and improve the quality of
care, but also to meet the cost containment objectives of third party payors.
The Company believes that the evolution of disease specialty treatment networks
will play a major role in managed care contracting as payors recognize that both
cost savings and the quality of care are improved when reimbursement and health
care services target a specific illness or disease through coordinated networks
of health care providers.
Strategy
The Company's strategy is to develop, operate and manage integrated
disease specialty and primary care physician networks which provide high
quality, cost-effective physician and related medical support services. The key
elements of this strategy are to:
Acquire Physician Practices. The Company seeks to acquire the
practices of and affiliate, in its target markets, with (i) high profile disease
specialty and primary care physicians, (ii) multi-specialty physician groups and
(iii) independent physician associations. By affiliating with leading physicians
and physician groups in a given community, the Company can secure a large
patient base, ensure appropriate, quality treatment and maintain patient
satisfaction. Additionally, as the Company affiliates with physicians in certain
markets, it makes available to these physicians medical support services,
including the Company's radiation therapy, diagnostic imaging, lithotripsy,
infusion and home health care services. By integrating these acquired disease
specialty and primary care medical practices with related medical support
services, the Company is able to develop a continuum of care in its target
markets.
Develop Practice Networks. In conjunction with its acquisition
strategy, the Company seeks to build integrated networks of disease specialty
and primary care physicians in targeted markets termed local provider units or
"LPNs." To form the foundation of an LPN, the Company typically acquires a core
physician practice, which may be either a disease specialty or primary care
practice. The Company then seeks to acquire or affiliate with additional
physician practices and medical support services related to that core practice
as well as other medical specialties outside the scope of the core practice.
Through the implementation of this strategy, the Company seeks to provide a
comprehensive range of health care services within a given region, thereby
enhancing its ability to enter into contractual arrangements with managed care
organizations.
Facilitate Acquisitions and Integration Through Development. As a
part of its strategy to affiliate with physicians and acquire physician
practices and medical support service companies, the Company provides medical
facility development services to related and unrelated third parties for the
establishment of health parks, medical malls and medical office buildings. The
Company believes that the relationships that it fosters with 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
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Company's affiliated physicians are responsible for providing all or a portion
of disease specific health care services to a particular patient population, or
the Company may develop a broader array of services designed to enhance its
ability to attract comprehensive managed care contracts.
Implement Integrated Information Systems. The Company intends to
continue to develop its integrated information management systems so as to
improve patient care by improving physician access to patient information. The
Company believes these processing capabilities will further enhance its ability
to service managed care contracts by providing access to the clinical and
financial data necessary to perform outcome studies, cost analyses, utilization
reviews and other analyses which can provide the information necessary for the
managed care community to evaluate and contract with the Company and its health
care providers.
Achieve Operating Efficiencies. The Company seeks to achieve
operating efficiencies through the consolidation of physician practices. By
consolidating overhead, including billing, collections, accounting and payroll,
the Company believes that it can realize significant operating efficiencies. In
addition, by rendering support and management functions, the Company enables its
affiliated physicians to spend a higher proportion of their time with patients,
thereby improving patient care and enhancing revenue.
Physician Affiliation
To date, the Company has affiliated with 128 physicians in the
following locations:
No. of
Physicians
Under
LPN Contract Specialties
- --- ---------- -----------
South Florida.................. 73 Primary Care, Oncology,
Cardiology, Gastroenterology,
Neurology, Podiatry,
Rheumatology, Obstetrics-
Gynecology, General and
Vascular Surgery, Dermatology,
Pulmonary, Orthopedic and
Radiology
Atlanta........................ 42 Oncology, Gastroenterology
and Urology
Washington, D.C./Baltimore..... 8 Oncology and Infectious
Diseases
Other Markets.................. 5 Oncology and Surgery
------
Total Physicians............... 128
======
The Company affiliates with physicians through management agreements
with physician practices or employment agreements with individual physicians.
When affiliating with physicians, the Company generally acquires the assets of
the physician practice, including its equipment, furniture, fixtures and
supplies and, in some cases, service contracts and goodwill. Currently, the
Company manages the practices of 98 physicians and employs another 30
physicians. With the exception of 12 radiation oncologists employed by the
Company through OTI, the Company purchased the practices of all of its 128
affiliated physicians. The Company derives revenues from affiliated physicians
through management fees charged to managed physician practices and from charges
to third parties for services provided by employed physicians.
The Company's relationships with its affiliated physicians are set
forth in various asset purchase, management services, employment and consulting
agreements. Through the asset purchase agreement, the Company acquires at fair
market value the assets of the practice. The accounts receivable are typically
purchased at the net
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realizable value. The purchase price of the assets of a physician practice
generally consists of cash and the assumption of certain debt, leases and other
contracts necessary for the operation of the practice.
The Company and its affiliated physicians enter into management
services or employment agreements which delineate the responsibilities and
obligations of each party. The management services agreements generally have a
10 to 20-year term. The employment agreements generally have a seven to 10-year
term, and in most instances, the contracting physicians can extend the terms of
their employment agreements in five-year increments for an unlimited duration
until they reach a specified age. The management services agreements provide
that the physicians are responsible for the provision of all medical services
and the Company is responsible solely for the management and operation of all
other aspects of the affiliated practice. The Company provides the equipment,
facilities and supplies necessary to operate the medical practice and employs
substantially all of a practice's non-physician personnel, except those whose
services are directly related to the provision of medical care. The management
and administration of the practice, including managed care contracting, rests
with the Company. Generally, a management services agreement with a physician
practice group cannot be terminated by either the Company or the practice group
prior to its stated expiration date without cause. The Company's employment
agreements generally are terminable by the physicians upon 90 to 180-days
notice. Ordinarily, the Company reserves the right to renegotiate terms of the
management services agreement if there are significant changes in reimbursement
levels. Upon termination for cause or at the expiration of a physician's
relationship with the Company, the Company has the right to require the
affiliated physicians to repurchase certain assets originally purchased by the
Company and assets acquired during the term of the relationship.
For providing services under the management services agreements
entered into prior to April 30, 1996, physicians generally receive a fixed
percentage of net revenue of the practice. "Net revenue" is defined as all
revenue computed on an accrual basis generated by or on behalf of the practice
after taking into account certain contractual adjustments or allowances. Net
revenues for these management services agreements for the three months ended
April 30, 1996 were $17.2 million. The revenue is generated from professional
medical services furnished to patients personally by physicians or other
clinicians under physician supervision. In several of the practices, the Company
has guaranteed that the net revenues of the practice will not decrease below the
net revenues that existed immediately prior to the agreement with the Company.
Additionally, in certain practices, the Company charges a fixed or variable
management fee. Under management services agreements entered into after April
30, 1996, the Company has received a fixed base management fee and a variable
incentive fee.
The Company believes a shared governance approach is critical to the
long-term success of a physician practice management company. In this regard,
the Company's agreements provide for physician concurrence on critical strategic
issues such as annual operating and capital budgets, fee structures and
schedules and the practice's strategic plan. The strategic plan developed for
the affiliated physician practices addresses both the future addition of
practitioners and the expansion of locations and services. The Company works
closely with its affiliated physicians to target and recruit new physicians and
merge or integrate other groups and specialties.
Medical Support Services
As part of its strategy to provide a comprehensive range of health
care services in its markets, the Company provides certain medical support
services related to the management of disease and episodic care, including
radiation therapy, diagnostic imaging, infusion therapy, home health care and
lithotripsy services. These services are provided both as part of the Company's
LPN structure and separately in certain markets in which there is a competitive
advantage to do so.
Within the scope of its disease specialty networks, the Company
delivers a broad array of medical support services. The Company supports its
cancer networks with radiation therapy (the Company has 11 radiation therapy
centers in six states), infusion therapy (the Company provides infusion therapy
in several states which are managed from three regional offices), diagnostic
imaging (the Company has two centers in two states) and home health care
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services (the Company provides home health care services in six South Florida
counties which are managed from five local offices).
The Company also provides lithotripsy services and currently operates
one fixed site and seven mobile lithotripters which provide lithotripsy services
in Arkansas, Florida, Indiana, Kansas, Kentucky, Missouri, Oklahoma, Tennessee
and Texas. These services are managed from three regional offices. Lithotripsy
is a non-invasive procedure that utilizes shock waves to fragment kidney stones,
and is the preferred alternative to surgery for kidney stones, suitable for the
treatment of over 90% of the applicable patients. The Company provides its
mobile lithotripsy services under contracts with approximately 70 hospitals and
other health care facilities. The hospital or health care facility normally pays
the Company on a per procedure basis. The Company's contracts with such
hospitals and facilities generally have terms of one to three years.
LPNs
Upon entering a target market, the Company seeks to acquire a core
practice group, affiliate with additional physician group practices and acquire,
develop or affiliate with related medical support services to form an LPN. The
Company undertakes market analyses and demographic studies to evaluate the
business opportunities in a particular geographic area and seeks to capitalize
on these opportunities by developing relationships with appropriate physicians
and other health care providers. Within each LPN, the Company seeks a balance
between primary care and specialty physicians and to integrate certain related
medical support services for the ultimate purpose of providing a strategic
network of comprehensive medical services attractive to managed care and
risk-based third party contractors. In certain markets, the Company establishes
relationships with unaffiliated entities for the purpose of contracting with
managed care companies. The Company currently has identified the South Florida,
Atlanta, Connecticut and Baltimore/Washington, D.C. areas as its initial target
markets and the Arizona, Pittsburgh and Tampa Bay areas as its secondary target
markets.
The development of the Company's Atlanta LPN provides an example of
the implementation of the Company's development strategy. In Atlanta, the
Company acquired three radiation centers in March 1995 and has since created a
comprehensive cancer disease management network of 22 oncologists in 17 sites.
The Company's Atlanta LPN continues to develop by affiliating with primary care
and multi-specialty groups to create a comprehensive, fully-integrated regional
network. During May 1996, the Company entered into a management agreement with
eight gastroenterologists in Atlanta. During July 1996, the Company entered into
a management agreement with three urologists in Atlanta. The Company is
presently negotiating with over 75 physician providers and is assessing the
opportunity to create a comprehensive health park in the Atlanta area.
In the South Florida market, the Company initially developed
affiliate relationships with six primary care physicians. Subsequently, the
Company has contracted with 19 oncologists and currently operates a cancer care
network which through capitated managed care contracts provides services to
approximately 137,000 covered lives. In addition, the Company provides infusion
therapy, home health, diagnostic and rehabilitation services in its South
Florida LPN.
In the Washington, D.C./Baltimore area, the Company operates three
radiation centers and provides infusion therapy services through its managed
care contracts and physician affiliations. The Company has affiliated with eight
medical and radiation oncologists. In addition, the Company entered into a
letter of intent with the Medlantic Healthcare Group in Washington, D.C. (and
its Washington Hospital Center and Washington Cancer Institute) for the
formation and operation of the Washington Regional Oncology Network. This
network will be dedicated to obtaining contracts for cancer care in the
Washington region and also includes the formation of a joint venture for the
management of the Washington Ambulatory Infusion Center.
The Company believes that cancer-related LPNs provide the greatest
opportunity for contracting with managed care and risk-based third party payors
and has entered into affiliate agreements with 60 oncologists. Net revenues for
the cancer related LPNs for the three months ended April 30, 1996 were $21.1
million. In its South
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Florida, Atlanta and Washington, D.C./Baltimore LPNs, the Company has assembled
three discrete networks of cancer physicians and related cancer care services,
and as a result, the Company provides services pursuant to managed care
contracts to over 200,000 covered lives. Under these contracts, the Company and
its affiliate physicians provide some or all of the following services: medical
and radiation oncology services, bone marrow transplants, infusion therapy,
diagnostic services and home care. The Company has also developed cancer care
networks with unaffiliated entities for contracting purposes in certain markets.
Independent Physician Associations
The Company owns a 43.75% interest in a newly formed management
services organization that provides management services to an independent
physician association ("IPA") composed of over 330 physicians based in
Connecticut and a 50% interest in a newly formed management services
organization that provides management services to an IPA composed of 45 primary
care physicians in Georgia. An IPA is generally composed of a group of
geographically diverse independent physicians who form an association for the
purpose of contracting as a single entity. The IPA structure not only increases
the purchasing power of the constituent practices, but also provides a
foundation for the development of an integrated physician network. The Company
believes that many IPAs will merge with other practice groups to develop larger
integrated medical groups, thereby becoming increasingly attractive to managed
care companies. The Company intends to capitalize on its affiliations with IPAs
to establish additional LPNs.
The Company also seeks to enter into agreements to manage capitated
provider networks. The Company expects that under these agreements, it would
receive a fixed management fee based upon contract revenues as well as a certain
percentage of risk pools.
Medical Facility Development
The Company provides medical facility development services to related
and unrelated third parties for the establishment of health parks, medical malls
and medical office buildings. A "health park" is an integrated health care
environment comprised of several buildings which links physician practices,
medical support services and sub-acute care facilities on a single campus. A
"medical mall," often found in a health park, combines physician offices with
related medical support services such as diagnostic imaging, physical
rehabilitation, laboratory services and wellness programs in one facility. The
Company also develops office buildings which serve physicians and providers of
ancillary medical services.
The Company believes that the convenience of "one-stop" scheduling
and medical related services together with on-site treatment provided at the
Company's developed medical facilities will increase patient satisfaction and
cost-efficiency. By providing a centralized delivery site for state-of-the-art
technology, information systems and patient care models, a full continuum of
care can be provided by a wide range of physician specialties and medical
support services at one location. The Company believes that physicians will find
affiliation with such facilities attractive and that third party payors will
seek to contract with physician practices and related medical support service
companies operating in such facilities.
The Company's medical facility development services include project
finance assistance, project management, construction management, construction
design engineering, consulting, physician recruitment, leasing and marketing.
The Company currently has 15 projects under development and has facilities under
construction in Florida, Texas, California and Arizona. The Company also has
four projects under contract and anticipates that construction of such
facilities will begin during 1996. Net revenues for the three months ended April
30, 1996 were $3.7 million.
Under its development agreements, the Company is generally obligated
to secure funding for and guaranty the maximum cost of a project. In order to
minimize the risks from these obligations, the Company enters into construction
agreements with general contractors to construct the project for a "guaranteed
maximum cost."
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Furthermore, each construction agreement provides for indemnification of the
Company by the general contractor for certain losses and damages. Each
construction agreement also requires the contractor to obtain and maintain a
performance bond and a labor and material payment bond, written by a surety
company with a Best's Key Guide Rating of not less than A+12 and satisfactory to
the owner of the land on which a project is developed and the construction
lender.
Among the Company's development clients are some of the largest
for-profit public hospital companies in the United States. To date, the
Company's clients and primary negotiators of the Company's fees generally have
been the land owners or land lessors of the developed sites. Negotiations
generally include the Company, the entities which own the developed projects,
the land lessor (if applicable) and, in many cases, the prospective tenants of
the office space. The Company offers its physician-tenants an opportunity to
become equity investors in the facility. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Medical Facility
Development." The compensation received by the Company is based upon negotiated
amounts for each service provided. Although the Company does not maintain an
ownership interest in the facilities it develops, certain of the Company's
officers and directors have an interest in such facilities. See "Certain
Transactions." In each transaction between the Company and a facility in which
certain of its officers and directors have an interest, third parties, including
the land owners and land lessors of the sites and the unaffiliated investors in
the facility, participate in establishment of fees to the Company. All
transactions between the Company and affiliated owners and physicians are and
will continue to be based upon competitive bargaining and are and will be on
terms no less favorable to the Company than those provided to unaffiliated
parties. In addition, the Company monitors development fees in the industry to
ensure that its fees in such transactions meet this standard.
The Company believes that its medical facility development services
and project finance strategy are a significant component of the Company's
overall business strategy. The Company's project finance strategy focuses upon
the involvement of its future tenants as significant investors in and owners of
the medical facilities developed by the Company. Because its tenants are
physicians and medical support service companies, the Company believes that the
relationships that it develops through its medical facility development efforts
will greatly enhance the Company's ability to affiliate with physicians and
acquire physician practices and medical support service companies. The
development of medical facilities by the Company is intended to enhance the
creation of the new group practices, increase the number of integrated medical
service delivery sites and promote alternative delivery models for third party
payors in its developed sites. The Company believes that such activity, in turn,
will aid in the integration of its affiliated physicians and medical support
service companies.
Information Systems
The Company believes that effective and efficient integration of
clinical and financial data provides a competitive advantage in bidding for
managed care contracts and contributes to a company's success in the complex
reimbursement environment of the health care industry. The Company also believes
that the use of technology can improve patient care by improving physician
access to patient information. Therefore, the Company is in the process of
selecting management information systems designed to facilitate the transmittal
and coordination of important patient and operational data. The Company's
objective is to implement a system which consists of three specific areas:
practice management, electronic clinical records and comprehensive care and
management reporting. The implementation of the system selected will occur in
stages, as the Company 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.
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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 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
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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.
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Although some of these physician groups may make referrals to the Company for
services, the Company cannot expect to receive income from the making of such
referrals.
Many states have adopted similar prohibitions against payment
intended to induce referrals of Medicaid and other third party payor patients.
The State of Florida, for instance, enacted a Patient Self-Referral Act in April
1992 that severely restricts patient referrals for certain services, prohibits
mark-ups of certain procedures, requires disclosure of ownership in a business
to which patients are referred and places other regulations on health care
providers. The Company believes it is likely that other states will adopt
similar legislation. Accordingly, expansion of the operations of the Company to
certain jurisdictions may require it to comply with such jurisdictions'
regulations which could lead to structural and organizational modifications of
the Company's form of relationships with physician groups. Such changes, if any,
could have an adverse effect on the Company.
The Company is in the process of adopting a formal compliance program
designed to prevent violations of Stark II and the Anti-kickback Amendments in
both its acquisitions and day to day operations. The Company intends to hire a
full-time compliance officer to implement and monitor the compliance program.
Laws in all states regulate the business of insurance and the
operation of HMOs. Many states also regulate the establishment and operation of
networks of health care providers. While these laws do not generally apply to
the hiring and contracting of physicians by other health care providers, there
can be no assurance that regulatory authorities of the states in which the
Company operates would not apply these laws to require licensure of the
Company's operations as an insurer, as an HMO or as a provider network. The
Company believes that it is in compliance with these laws in the states in which
it does business, but there can be no assurance that future interpretations of
insurance and health care network laws by regulatory authorities in these states
or in the states into which the Company may expand will not require licensure or
a restructuring of some or all of the Company's operations.
Reimbursement and Cost Containment
Approximately 40% of the revenue of the Company's affiliated
physician groups is derived from payments made by government sponsored health
care programs (principally, Medicare and Medicaid). As a result, any change in
reimbursement regulations, policies, practices, interpretations or statutes
could adversely affect the operations of the Company. The U.S. Congress has
passed a fiscal year 1996 budget resolution that calls for reductions in the
rate of spending increases over the next seven years of $270 billion in the
Medicare program and $182 billion in the Medicaid program. Through the Medicare
program, the federal government has implemented a resource-based relative value
scale ("RBRVS") payment methodology for physician services. This methodology
went into effect in 1992 and will continue to be implemented in annual
increments through December 31, 1996. RBRVS is a fee schedule that, except for
certain geographical and other adjustments, pays similarly situated physicians
the same amount for the same services. The RBRVS is adjusted each year and is
subject to increases or decreases at the discretion of Congress. The
implementation of RBRVS may result in reductions in payment rates for procedures
provided by physicians under current contract with the Company. 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.
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In addition to current governmental regulation, the Clinton
Administration and several members of Congress have proposed legislation for
comprehensive reforms affecting the payment for and availability of health care
services. Aspects of certain of such health care proposals, such as reductions
in Medicare and Medicaid payments, if adopted, could adversely affect the
Company. Other aspects of such proposals, such as universal health insurance
coverage and coverage of certain previously uncovered services, could have a
positive impact on the Company's business. It is not possible at this time to
predict what, if any, reforms will be adopted by Congress or state legislatures,
or when such reforms would be adopted and implemented. As health care reform
progresses and the regulatory environment accommodates reform, it is likely that
changes in state and federal regulations will necessitate modifications to the
Company's agreements and operations. While the Company believes it will be able
to restructure in accordance with applicable laws and regulations, the Company
cannot assure that such restructuring in all cases will be possible or
profitable.
Rates paid by private third party payors, including those that
provide Medicare supplemental insurance, are based on established physician,
clinic and hospital charges and are generally higher than Medicare payment
rates. Changes in the mix of the Company's patients among the non-government
payors and government sponsored health care programs, and among different types
of non-government payor sources, could have a material adverse effect on the
Company.
The Company is a provider of certain medical treatment and diagnostic
services including, but not limited to radiation therapy, infusion therapy,
lithotripsy and home care. Because many of these services receive governmental
reimbursement, they may be subject from time to time to changes in both the
degree of regulation and level of reimbursement. Additionally, factors such as
price competition and managed care could also reduce the Company's revenues. See
"Business--Government Regulation."
Insurance
Health care companies, such as the Company, are subject to medical
malpractice, personal injury and other liability claims which are customary
risks inherent in the operation of health care facilities and provision of
health care services. The Company maintains property insurance equal to the
amount management deems necessary to replace the property, and liability and
professional malpractice insurance policies in the amount of $20,000,000 (annual
aggregate) and with such coverages and deductibles which are deemed appropriate
by management, based upon historical claims, industry standards and the nature
and risks of its business. The Company provides medical malpractice insurance
for its employee physicians in the amount of $1,000,000 per claim and $3,000,000
annual aggregate and also requires that non-employee physicians practicing at
its facilities carry medical malpractice insurance to cover their respective
individual professional liabilities. There can be no assurance that a future
claim will not exceed available insurance coverages or that such coverages will
continue to be available for the same scope of coverages at reasonable premium
rates. Any substantial increase in the cost of such insurance or the
unavailability of any such coverages could have a material adverse effect on the
Company's business.
Employees
As of April 30, 1996, the Company employed approximately 1,200
persons, approximately 700 of whom were full-time employees. The Company
believes that its labor relations are good.
Legal Proceedings
The Company is subject to legal proceedings in the ordinary course of
its business. The Company does not believe that any such legal proceedings will
have a material adverse effect on the Company, although there can be no
assurance to this effect.
A subsidiary of the Company, OTI (formerly Radiation Care, Inc.,
"RCI") is subject to the litigation described below which relates to events
prior to the Company's operation of RCI, and the Company has agreed to
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indemnify and defend certain defendants in the litigation who were former
directors and officers of RCI subject to certain conditions.
In December 1994, prior to its merger with the Company in March 1995,
RCI entered into a settlement agreement with the federal government arising out
of claims under the fraud-and-abuse provisions of the Medicare law. Under the
settlement agreement, RCI, without admitting that it violated the law, consented
to a civil judgment providing for its payment of $2 million to the federal
government and the entry of an injunction against violations of such provisions.
On February 16, 1995, six former stockholders of RCI filed a
consolidated amended Class Action Complaint in Delaware Chancery Court (In re
Radiation Care, Inc. Shareholders Litigation, Consolidated C.A. No. 13805)
against RCI, Thomas Haire, Gerald King, Charles McKay, Abraham Gosman, Oncology
Therapies of America, Inc. ("OTA") and A.M.A. Financial Corporation, ("AMA")
alleging that the RCI stockholders should have received greater consideration
for their RCI stock when RCI was merged with the Company. Plaintiffs allege
breaches of fiduciary duty by the former RCI directors, as well as aiding and
abetting of such fiduciary duty breaches by Mr. Gosman, OTA and AMA. Plaintiffs
seek compensatory or rescissionary damages of an undisclosed amount on behalf of
all RCI stockholders, together with an award of the costs and attorneys' fees
associated with the action. No class has been certified in this litigation. On
May 18, 1996, the Company filed an Answer denying any liability in connection
with this litigation. The Company intends to vigorously defend against this
litigation.
On August 4, 1995, 26 former stockholders of RCI filed a Complaint
for Money Damages against Richard D'Amico, Ted Crowley, Thomas Haire, Gerald
King, Charles McKay and Randy Walker (all former RCI officers and directors) in
the Superior Court of Fulton County, in the State of Georgia (Southeastern
Capital Resources, L.L.C. et al. v. Richard D'Amico et al., Civil Action No.
E41225). Two of the plaintiffs have withdrawn from the litigation. Plaintiffs
allege a breach of fiduciary duty by the former RCI directors Haire, King and
McKay, a conspiracy by the RCI officer defendants D'Amico, Crowley and Walker,
and negligence by all defendants. Plaintiffs seek additional consideration for
their shares of RCI common stock in the form of compensatory and monetary
damages in the amount of $5.7 million, plus punitive damages, interest, costs
and attorneys fees. On September 22, 1995, the defendants filed an Answer
denying any liability in connection with this litigation. On October 23, 1995,
the defendants filed a motion to stay the action pending resolution of the
Delaware class action which was heard by the Court on January 29, 1996 and
denied on April 9, 1996. Plaintiffs have filed a motion with a proposed amended
complaint adding four plaintiffs to the action, upon which the court has not yet
acted. The Company is not a party to this litigation and its exposure is limited
to its obligation under its by-laws to indemnify the former officers and
directors of RCI to the fullest extent permitted by Delaware law. The Company
intends to vigorously defend against this litigation.
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 .....................................66 Chairman of the Board of Directors,
President and Chief Executive Officer
Frederick R. Leathers.....................................38 Chief Financial Officer and Treasurer
William A. Sanger .....................................45 Executive Vice President and Chief Operating Officer
Robert A. Miller .....................................41 Executive Vice President of Acquisitions
Edward E. Goldman, M.D....................................51 Executive Vice President of Physician Development
Francis S. Tidikis .....................................48 Executive Vice President of Marketing
Jeannette M. McGill .....................................45 Executive Vice President of Finance
Don S. Harvey .....................................38 Vice President of Operations
Donald A. Sands .....................................45 Vice President -- Medical Facility Development
Hugh L. Carey .....................................76 Director
Joseph N. Cassese .....................................66 Director
John T. Chay .....................................38 Director
David M. Livingston, M.D..................................55 Director
Bruce A. Rendina .....................................42 Director
Stephen E. Ronai .....................................59 Director
</TABLE>
The following is a biographical summary of the experience of the
executive officers and directors of the Company:
Abraham D. Gosman has served since June 1994 as an executive officer
of the Company and is presently the Chairman of the Board of Directors,
President and Chief Executive Officer of the Company. Previously, he founded and
was the principal owner of The Mediplex Group, Inc. ("Mediplex"), a diversified
health care company, and its predecessor companies for more than 15 years, with
the exception of the period from April 1986 to August 1990 when Mediplex was
owned by Avon Products, Inc. ("Avon"). He was the Chief Executive Officer of
Mediplex from its inception to September 1988 and assumed that position again
after Mediplex was purchased from Avon in August 1990. In addition, Mr. Gosman
has served as Chairman of the Board of Trustees and Chief Executive Officer of
Meditrust, the nation's largest health care real estate investment trust, since
its inception in 1985.
Frederick R. Leathers has served since June 1994 as the Chief
Financial Officer and Treasurer of the Company. Previously, he served as
Treasurer, Chief Financial Officer and Principal Accounting Officer of Mediplex
from October 1991 to June 1994, Corporate Controller from May 1991 to October
1991 and held the 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
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in Atlantis, Florida from February 1992 to September 1994 where he developed
integrated delivery networks and implemented a comprehensive physician
acquisition strategy. He served as Executive Vice President and Chief Operating
Officer of Saint Vincent Medical Center, Toledo, Ohio from January 1990 to
February 1992.
Robert A. Miller has served since June 1994 as an executive officer
of the Company and is presently Executive Vice President of Acquisitions.
Previously, he served as Senior Vice President/Development Operations of
Mediplex from September 1992 and Vice President from June 1991. Mr. Miller
served as Regional Operations Director for New Medico Associates from January
1991 to October 1991. Previously, Mr. Miller was Vice President of Hospital
Operations of Glenbeigh, Inc., where he was employed from 1979 through 1991.
Edward E. Goldman, M.D. has served since October 1994 as President of
a subsidiary of the Company, since October 1995 as an executive officer of the
Company and is presently Executive Vice President of Physician Development. Dr.
Goldman is a board certified family practice physician and previously served as
Chairman of PAL-MED Health Services from February 1983 to September 1994, a
multi-specialty IPA which provides physicians services and manages health care
related services.
Francis S. Tidikis has served since January 1996 as Executive Vice
President of Marketing of the Company. Mr. Tidikis has served as Senior Vice
President of Physician Management Services for Tenet Healthcare Corporation
since March 1995. Mr. Tidikis has been with Tenet Healthcare Corporation and its
predecessor, National Medical Enterprises, since April 1981, serving as
Executive Vice President of the Eastern District from June 1991 to February 1995
and as Vice President of Operations for the Eastern Region Hospital Group from
February 1984 to September 1990. Mr. Tidikis currently serves as a director of
Professional Liability Insurance Company.
Jeannette M. McGill has served since September 1994 as a financial
officer of the Company, and since October 1995 as an executive officer of the
Company and is presently Executive Vice President of Finance. Ms. McGill served
as President and Principal Stockholder of McGill, Roselli, Ayala and Hoppman, a
certified public accounting firm in West Palm Beach, Florida from July 1983 to
September 1994. Ms. McGill specialized in accounting and financial planning for
physician practices.
Don S. Harvey has served as an operations officer of the Company
since April 1995 and as an executive officer since October 1995 and is presently
Vice President of Operations. He was a consultant to the Company from January
1995 to April 1995. Mr. Harvey served as Executive Vice President and Chief
Operating Officer of JFK Medical Center in Atlantis, Florida from April 1990 to
December 1994, where he developed and managed medical related services.
Donald A. Sands has served as the Vice President - Medical Facility
Development since January 1996. He has served since 1995 as Chairman of the
Board and Chief Executive Officer of DASCO. Previously, Mr. Sands served as
President of DASCO from 1985. From 1984 to 1985, he was Director of Development
for Loews Hotels and was Counsel for Westin Hotel Company from 1979 to 1984.
Hugh L. Carey has served as a director of the Company since February
21, 1996. Currently, he is Chairman of the Board of Advisors of Cambridge
Partners, L.L.C. He served as an Executive Vice President 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.
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John T. Chay has served as a director of the Company since April 15,
1996. Mr. Chay has served as an executive officer of Nutrichem, Inc. which he
co-founded in November 1993 and has served since June 1991 as Chief Executive
Officer of The HealthLink Group, Inc., a practice management consulting firm
which he also founded.
David M. Livingston, M.D. has served as a director of the Company
since January 29, 1996. Dr. Livingston has been a Director of Dana-Farber Cancer
Institute in Boston, Massachusetts since 1991 and has been employed as a
physician at the Institute since 1973. He currently serves as Chairman of the
Institute's Department of Medicine. He is also the Emil Frei Professor of
Medicine at Harvard Medical School where he has taught since 1973.
Bruce A. Rendina has served as a director of the Company since
January 29, 1996. Mr. Rendina has served since 1994 as President of DASCO, which
he co-founded with Mr. Sands. Previously, he served as its Executive Vice
President from 1987 to 1994.
Stephen E. Ronai has served as a director of the Company since
January 29, 1996. Mr. Ronai has been a partner in the Connecticut law firm of
Murtha, Cullina, Richter and Pinney since 1984 where he serves as Chairman of
the firm's Health Care Department. He is a member of the American Academy of
Healthcare Attorneys of the American Hospital Association, and from 1989 to 1995
he served as a member of the Board of Directors of the National Health Lawyers
Association.
The Board of Directors is divided into three classes, with staggered
three-year terms. The initial terms of Messrs. Rendina and Ronai will expire at
the Company's 1996 annual meeting; of Mr. Cassese and Dr. Livingston at the
Company's 1997 annual meeting; and of Messrs. Gosman, Carey and Chay at the
Company's 1998 annual meeting. Successors to the directors whose terms expire at
each annual meeting are eligible for election for three-year terms. A director
holds office until the annual meeting for the year in which his term expires and
until his successor is elected and qualified. These provisions may make it more
difficult for holders of the Common Stock to remove the directors and officers
of the Company than if all directors were elected on an annual basis.
Officers are appointed by and serve at the discretion of the Board of
Directors. The officers, other than Mr. Gosman, will devote substantially all of
their business time to the business and affairs of the Company.
Executive Committee. The members of the Executive Committee of the
Company's Board of Directors are Messrs. Gosman, Rendina and Cassese. The
Executive Committee exercises all the powers of the Board of Directors between
meetings of the Board of Directors, except such powers as are reserved to the
Board of Directors by law.
Audit Committee. The members of the Audit Committee of the Company's
Board of Directors are Messrs. Carey and Ronai, both of whom are independent
directors. The Audit Committee makes recommendations concerning the engagement
of independent public accountants, reviews with the independent public
accountants the plans for and results of the audit, approves professional
services provided by the 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.
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Equity Incentive Committee. The members of the Equity Incentive
Committee of the Company's Board of Directors are Messrs. Cassese and Ronai. The
Equity Incentive Committee determines who shall receive awards under the 1995
Equity Incentive Plan, from those employees, consultants and directors who are
eligible to participate in the Equity Plan, the type of award to be made, the
number of shares of Common Stock which may be acquired pursuant to the award and
the specific terms and conditions of each award.
Compensation Committee Interlocks and Insider Participation
In 1995, the Company did not have a Compensation Committee or any
other committee of the Board of Directors performing similar functions.
Decisions concerning compensation of executive officers were made by Mr. Gosman,
the Chairman, Chief Executive Officer and President of Company.
Compensation of Directors
Officers who are members of the Board of Directors do not receive
compensation for serving on the Board. Each other member of the Board receives
annual compensation of $15,000 for serving on the Board, plus a fee of $1,000
for each Board of Directors' meeting attended. In addition, such directors
receive an additional fee of $500 for each committee meeting attended, except
that only one fee will be paid in the event that more than one such meeting is
held on a single day. All directors receive reimbursement of reasonable expenses
incurred in attending Board and committee meetings and otherwise carrying out
their duties. Each non-employee director who was a member of the Compensation
Committee at the time of the closing of the initial public offering received
options to purchase 10,000 shares of Common Stock upon the closing of the
offering at the initial public offering price pursuant to the Equity Plan. Each
director who is a member of the Compensation Committee on the first business day
following each annual meeting of the shareholders will receive the option to
purchase 2,500 shares of Common Stock. Any of such options granted to a member
of the Compensation Committee under the Equity Plan will be exercisable one year
following the date of grant.
Executive Compensation
The following table sets forth certain information regarding
compensation paid or accrued by the Company during the period June 24, 1994
(inception) to December 31, 1994 and the year ended December 31, 1995, to the
Company's Chief Executive Officer and to each of the Company's four other most
highly compensated executive officers (the "Named Executive Officers") during
1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Annual
Compensation All Other
Salary Compensation(1)
Name and Principal Position Year ($) ($)
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
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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).
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
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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 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
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Awards which expire or are terminated prior to exercise or Common Stock which
has been forfeited under the Equity Plan will be available for future Awards
under the Equity Plan. Both treasury shares and authorized but unissued shares
may be used to satisfy Awards under the Equity Plan.
The Equity Plan may be amended from time to time by the Board of
Directors or terminated in its entirety; however, no amendment may be made
without stockholder approval if such approval is necessary to comply with any
applicable tax or regulatory requirement, including any requirement for
stockholder approval under Section 16(b) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), or any successor provision.
The Company did not award any options during 1994, however, in
connection with the Formation, upon the closing of the initial public offering,
the Company granted options under the Equity Plan in exchange for outstanding
options to purchase stock of certain Related Companies which outstanding
options, at the time that they were issued by the Related Companies, had an
exercise prices at least equal to the fair market value of common stock of the
Related Companies.
CERTAIN TRANSACTIONS
During 1994 and 1995, the Related Companies and Mr. Gosman completed
the acquisition of various companies and businesses which were transferred to
the Company in connection with the Formation. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Acquisition Summary"
for a description of the Acquisitions.
As of April 30, 1996, the Company had outstanding borrowings from Mr.
Gosman of approximately $11.7 million, which borrowings were made for working
capital purposes and to fund certain of the Acquisitions. At December 31, 1995
the Company also had a $19.5 million loan from NationsBank, which was guaranteed
by Mr. Gosman. Mr. Gosman did not receive any consideration for this or any
other guarantee he has provided on behalf of the Company. The $19.5 million loan
was repaid from the net proceeds of the initial public offering. After
repayments to Mr. Gosman made from the net proceeds of the initial public
offering totalling $28.7 million, the Company owed Mr. Gosman approximately
$10.8 million. All amounts loaned to the Company by Mr. Gosman accrue interest
at a floating rate equal to NationsBank's prime rate. The Company agreed to
repay in full the amount owed to Mr. Gosman from the proceeds of any public
offering by the Company of its debt or equity securities; and to repay Mr.
Gosman from the proceeds of any institutional debt financing by the Company for
working capital purposes, except that the amount to be repaid from such
institutional debt financing proceeds would not exceed 25% of the maximum amount
available to be borrowed under the terms of the financing. Pursuant to such
agreement, the $11.7 million the Company owed Mr. Gosman (including additional
amounts borrowed since the closing of the initial public offering) was repaid
from the net proceeds of the Debt Offering.
In connection with the acquisition of OTI in March 1995, Mr. Gosman
guaranteed until the later of the satisfaction of certain financial covenants or
July 31, 1998 the repayment by a subsidiary of the Company of a portion of the
$17.5 million in acquisition financing from FINOVA Capital Corporation
("FINOVA"). Mr. Gosman's liability under the guarantee was limited to no more
than $6.1 million. The Company used the net proceeds of the initial public
offering to repay in full its obligations to FINOVA.
During 1995, in addition to the guarantee discussed above, Mr. Gosman
guaranteed the payment by the Company of indebtedness in the amount of $4.6
million incurred in connection with the acquisition of DASCO, all of which was
repaid during 1996. In addition, Mr. Gosman executed a reimbursement agreement
and provided collateral for a letter of credit to secure other indebtedness of
the Company in the amount of $5.4 million incurred in connection with the
acquisition of Oncology & Radiation Associates, P.A. Upon the closing of the
initial public offering, the Company obtained the release of Mr. Gosman from
these guarantees and from his other obligations with respect to acquisition
indebtedness through the assumption by the Company of Mr. Gosman's obligation to
pay such Acquisition indebtedness and of the obligation to provide cash
collateral for the letter of credit.
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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 three months ended
April 30, 1996, the Company recorded revenues in the amount of $304,020 related
to such services. DASCO has and continues to provide all of its medical facility
development services to affiliated parties on terms no less favorable to the
Company than those provided to unaffiliated parties.
Meditrust, a publicly traded real estate investment trust with assets
in excess of $1.7 billion dollars of which Mr. Gosman is the Chairman of the
Board and Chief Executive Officer, has provided financing in the aggregate
amount of $150.0 million for the development of 15 facilities developed by
DASCO.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of April 30, 1996, certain
information regarding the beneficial ownership of shares of Common Stock by each
person known by the Company to be the beneficial owner of more than 5% of
outstanding Common Stock, by each director and each of the Named Executive
Officers of the Company and by all directors and executive officers as a group.
Except as indicated in the footnotes, all of such shares of Common Stock set
forth in the following table are owned directly, and the indicated person has
sole voting and investment power with respect to all Common Stock shown as
beneficially owned by such person:
Amount of Beneficial Ownership
--------------------------------
Shares
Beneficially Percentage
Name Owned Owned
- ---- ------------ ----------
Abraham D. Gosman (1).......... 8,282,305 38.5%
Frederick R. Leathers.......... 459,505 2.1
William A. Sanger.............. 336,224 1.6
Robert A. Miller............... 459,505 2.1
Edward E. Goldman, M.D......... 168,112 *
Joseph N. Cassese.............. -- *
David M. Livingston, M.D....... -- *
Bruce A. Rendina............... 916,667 4.3
Stephen E. Ronai............... 4,000 *
Hugh L. Carey.................. -- *
John T. Chay................... 142,833 *
All directors and executive
officers as a group
(15 persons)....... 11,698,484 54.3
- ----------------------
* Less than one percent.
(1) Includes 4,000,000 shares held by Mr. Gosman as trustee for the benefit
of his two adult sons. Mr. Gosman's business address is PhyMatrix Corp.,
777 South Flagler Drive, West Palm Beach, FL 33401.
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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."
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Conversion Rights
The Debentures will be convertible into Common Stock at any time
after 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.
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
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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 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.
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The Indenture does not limit or prohibit the incurrence of Senior
Indebtedness. At April 30, 1996, the Company had Senior Indebtedness in the
amount of approximately $7.0 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:
Year Redemption 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.
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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 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.
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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 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
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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
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
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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.
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
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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.
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").
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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.
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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 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
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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.
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
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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 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.
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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 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 which during such period has acted as an
Initial Purchaser, financial advisor and underwriter for the Company. The table
has been prepared based on information furnished to the Company by the
Depository Trust Company and or by or on behalf of the Selling Securityholders.
<TABLE>
<CAPTION>
Principal
Amount of
Debentures Number of
Beneficially Conversion
Owned Percentage of Shares Percentage of Common
That May Debentures That May Stock
Name (1) Be Sold (1) Outstanding Be Sold (2) Outstanding (3)
- ---------- ----------------- ----------------- ----------------- -------------------
<S> <C> <C> <C> <C>
[To be completed by amendment.]
</TABLE>
(1) The information set forth herein is as of , 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 21,529,950 shares of Common Stock outstanding as of ,
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.
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
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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.
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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.
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.
The financial statements of Osler Medical (a Partnership) for the
years ended December 31, 1994 and 1993, included in this Prospectus and
appearing elsewhere in this Registration Statement, have been audited by Hoyman,
Dobson & Company, P.A., independent accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in accounting and auditing.
The financial statements of Georgia Oncology-Hematology Clinic, P.C.
and Subsidiary for the year ended December 31, 1994 included in this Prospectus
and appearing elsewhere in this Registration Statement, have been audited by
Babush, Neiman, Kornman & Johnson, independent accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
The financial statements of Oncology-Hematology Associates, P.A. and
Oncology-Hematology Infusion Therapy, Inc. for the year ended December 31, 1994
and the financial statements of Oncology-Hematology Associates, P.A. for the
year ended December 31, 1993, included in this Prospectus and appearing
elsewhere in this Registration Statement, have been audited by Weil, Akman,
Baylin & Coleman, P.A., independent accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in accounting and auditing.
The financial statements of Cancer Specialists of Georgia, P.C. as of
July 31, 1995 and for the period from November 1, 1994 to July 31, 1995,
included in this Prospectus and appearing elsewhere in this Registration
Statement have been audited by Coopers & Lybrand LLP, independent accountants,
as indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing.
The financial statements of Mobile Lithotripter of Indiana Partners
for the years ended September 30, 1995, 1994 and the period February 12, 1993
(date of inception) to September 30, 1993, included in this Prospectus and
appearing elsewhere in this Registration Statement, have been audited by Katz,
Sapper & Miller, LLP, independent accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in accounting and auditing.
The financial statements of UroMed Technologies, Inc. for the period
January 1 to September 28, 1994 and the years ended December 31, 1993 and 1992,
included in this Prospectus and appearing elsewhere in this Registration
Statement, have been audited by Roy Cline, CPA, PA, independent accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing.
The financial statements of Nutrichem, Inc. for the period January 1
to November 17, 1994 and the ten months ended December 31, 1993, included in
this Prospectus and appearing elsewhere in this Registration 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.
83
<PAGE>
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.
The financial statements of Pinnacle Associates, Inc. as of December
31, 1994 and 1993 and the year ended December 31, 1994 and the period from
October 21, 1993 (inception) to December 31, 1993, included in this Prospectus
and appearing elsewhere in this Registration Statement, have been audited by
Coopers & Lybrand L.L.P., independent accountants, as indicated in their report
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the United States Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-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.
84
<PAGE>
PHYMATRIX CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
PHYMATRIX CORP
Balance Sheets--April 30, 1996 (unaudited) January 31, 1996 (unaudited) and December 31, 1995 F-5
Statements of Operations (unaudited)--three months ended April 30, 1996, one month ended January
31, 1996 and three months ended March 31, 1995 F-6
Statements of Cash Flows (unaudited)--three months ended April 30, 1996, one month ended January
31, 1996 and three months ended March 31, 1995 F-7
Notes to Financial Statements (unaudited) F-8
PHYMATRIX CORP.
Report of Coopers & Lybrand L.L.P. Independent Accountants F-11
Combined Balance Sheets as of December 31, 1995 and 1994 F-12
Combined Statements of Operations for the year ended December 31, 1995
and the period June 24, 1994 (inception) to December 31, 1994 F-13
Combined Statements of Changes in Shareholders' Equity for the year ended
December 31, 1995 and the period June 24, 1994 (inception) to December 31, 1994 F-14
Combined Statements of Cash Flows for the year ended December 31, 1995
and the period June 24, 1994 (inception) to December 31, 1994 F-15
Notes to Combined Financial Statements F-16
Acquisitions
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
Report of Coopers & Lybrand L.L.P., Independent Accountants F-33
Combined Balance Sheet as of September 30, 1995 F-34
Combined Statement of Income and Retained Earnings for the nine month period ended
September 30, 1995 F-35
Combined Statement of Cash Flows for the nine month period ended September 30, 1995 F-36
Notes to Combined Financial Statements F-37
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
Report of Bober, Markey & Company, Independent Accountants F-40
Combined Balance Sheets as of December 31, 1994, 1993 and 1992 F-41
Combined Statements of Income and Retained Earnings for the years ended December 31, 1994, 1993
and 1992 F-42
Combined Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992 F-43
Notes to Combined Financial Statements F-44
RADIATION CARE, INC. AND SUBSIDIARIES
Report of Coopers & Lybrand L.L.P. Independent Accountants F-47
Consolidated Balance Sheets as of December 31, 1994 and 1993 F-48
Consolidated Statements of Operations for the year ended December 31, 1994, the nine months
ended December 31, 1993 and the year ended March 31, 1993 F-49
Consolidated Statements of Stockholders' Equity for the year ended December 31, 1994, the nine
months ended December 31, 1993, and the year ended March 31, 1993 F-50
Consolidated Statements of Cash Flows for the year ended December 31, 1994, the nine months ended
December 31, 1993 and the year ended March 31, 1993 F-51
Notes to Consolidated Financial Statements F-52
F-1
<PAGE>
PHYMATRIX CORP.
INDEX TO FINANCIAL STATEMENTS--(Continued)
Page
--------
AEGIS HEALTH SYSTEMS, INC.
Report of Coopers & Lybrand L.L.P. Independent Accountants F-63
Balance Sheets as of March 31, 1995 (unaudited) and December 31, 1994 and 1993 F-64
Statements of Operations for the three months ended March 31, 1995 and 1994 (unaudited) and
the years ended December 31, 1994, 1993 and 1992 F-65
Statements of Cash Flows for the three months ended March 31, 1995 and 1994 (unaudited) and
the years ended December 31, 1994, 1993 and 1992 F-66
Notes to Financial Statements F-67
ONCOLOGY & RADIATION ASSOCIATES, P.A.
Report of Arthur Andersen LLP, Independent Accountants F-70
Balance Sheets as of December 31, 1993 and 1994 and September 12, 1995 F-71
Statements of Operations for the period September 1, 1992 (inception) to December 31, 1992 and
for the years ended December 31, 1993 and 1994 and for the period January 1, 1995 to
September 12, 1995 F-72
Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1993 and 1994,
and for the period January 1, 1995 to September 12, 1995 F-73
Statements of Cash Flows for the period September 1, 1992 (inception) to December 31, 1992 and
for the years ended December 31, 1993 and 1994 and for the period January 1, 1995 to
September 12, 1993 F-74
Notes to Financial Statements F-75
OSLER MEDICAL, INC.
Report of Arthur Andersen LLP, Independent Accountants F-78
Balance Sheet as of September 14, 1995 F-79
Statement of Operations and Retained Earnings for the period from January 1, 1995 to
September 14, 1995 F-80
Statement of Cash Flows for the period from January 1, 1995 to September 14, 1995 F-81
Notes to Financial Statements F-82
OSLER MEDICAL
Report of Hoyman, Dobson & Company, P.A., Independent Public Accountants F-86
Balance Sheets as of December 31, 1994 and 1993 F-87
Statements of Income and Partners' Capital for the years ended December 31, 1994 and 1993 F-88
Statements of Cash Flows for the years ended December 31, 1994 and 1993 F-89
Notes to Financial Statements F-90
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C.
Balance Sheet as of April 14, 1995 (unaudited) F-97
Statement of Operations and Retained Earnings for the period
January 1, 1995--April 14, 1995 (unaudited) F-98
Statement of Cash Flows for the period January 1, 1995--April 14, 1995 (unaudited) F-99
GEORGIA ONCOLOGY--HEMATOLOGY CLINIC, P.C. AND SUBSIDIARY
Report of Babush, Neiman, Kornman & Johnson, Independent Accountants F-100
Consolidated Balance Sheet as of December 31, 1994 F-101
Consolidated Statement of Operations and Retained Earnings for the year ended December 31,
1994 F-102
Consolidated Statement of Cash Flows for the year ended December 31, 1994 F-103
Notes to Consolidated Financial Statements F-104
F-2
<PAGE>
PHYMATRIX CORP.
INDEX TO FINANCIAL STATEMENTS--(Continued)
Page
--------
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND ONCOLOGY-HEMATOLOGY
INFUSION THERAPY, INC.
Combined Balance Sheet as of July 25, 1995 (unaudited) F-108
Combined Statement of Operations and Retained Earnings for the period January 1, 1995 through July
25, 1995 (unaudited) F-109
Combined Statement of Cash Flows for the period January 1, 1995 through July 25, 1995
(unaudited) F-110
ONCOLOGY--HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY--HEMATOLOGY INFUSION THERAPY, INC.
Report of Weil, Akman, Baylin & Coleman, P.A., Independent Accountants F-111
Combined Balance Sheets as of December 31, 1994 and 1993 F-112
Combined Statements of Operations and Retained Earnings for the year ended December 31,
1994 and 1993 (Oncology-Hematology Associates, P.A.) for the period March 7, 1994 (Date of
inception) through December 31, 1994 (Oncology-Hematology Infusion Therapy, Inc.) F-113
Combined Statements of Cash Flows for the year ended December 31, 1994 and 1993 (Oncology-
Hematology Associates, P.A.) for the period March 7, 1994 (Date of inception) through
December 31, 1994 (Oncology-Hematology Infusion Therapy, Inc.) F-114
Notes to the Financial Statements F-115
CANCER SPECIALISTS OF GEORGIA, P.C.
Report of Coopers & Lybrand L.L.P., Independent Accountants F-120
Balance Sheet as of July 31, 1995 F-121
Statement of Operations and Retained Earnings (Accumulated Deficit) for the nine month period
ended July 31, 1995 F-122
Statement of Cash Flows for the nine month period ended July 31, 1995 F-123
Notes to Financial Statements F-124
MOBILE LITHOTRIPTER OF INDIANA PARTNERS
Report of Katz, Sapper & Miller, LLP, Independent Accountants F-128
Balance Sheets as of September 30, 1995 and 1994 F-129
Statements of Income for the years ended September 30, 1995 and 1994 and the period from February
12, 1993 (date of formation) to September 30, 1993 F-130
Statements of Partners' Capital for the years ended September 30, 1995 and 1994 and the period
from February 12, 1993 (date of formation) to September 30, 1993 F-131
Statements of Cash Flows for the years ended September 30, 1995 and 1994 and the period from
February 12, 1993 (date of formation) to September 30, 1993 F-132
Notes to Financial Statements F-133
UROMED TECHNOLOGIES, INC.
Report of Roy Cline, CPA, PA, Independent Accountants F-136
Balance Sheets as of September 28, 1994 and December 31, 1993 and 1992 F-137
Statement of Income and Retained Earnings for the period ended September 28, 1994 and the
years ended December 31, 1993 and 1992 F-138
Statement of Cash Flows for the period ended September 28, 1994 and the years ended
December 31, 1993 and 1992 F-139
Notes to Financial Statements F-140
NUTRICHEM, INC.
Report of Regan, Russell, Schickner & Shah, P.A., Independent Accountants F-144
Balance Sheets as of November 17, 1994 and December 31, 1993 F-145
F-3
<PAGE>
PHYMATRIX CORP.
INDEX TO FINANCIAL STATEMENTS--(Continued)
Page
--------
Statements of Income for the period ended November 17, 1994 and the year ended December 31, 1993 F-146
Statements of Retained Earnings for the period ended November 17, 1994 and the year ended December
31, 1993 F-147
Statements of Cash Flows for the period ended November 17, 1994 and the year ended
December 31, 1993 F-148
Notes to Financial Statements F-150
FIRST CHOICE HOME CARE, INC.
Report of Patrick & Associates, PA, Independent Accountants F-152
Balance Sheets as of December 31, 1993 and November 22, 1994 F-153
Statements of Income and Retained Earnings for the year ending December 31, 1993 and interim
period ending November 22, 1994 F-154
Statements of Cash Flows for the year ending December 31, 1993 and interim period ending November
22, 1994 F-155
Notes to Financial Statements F-156
FIRST CHOICE HEALTH CARE OF FT. LAUDERDALE, INC.
Report of Patrick & Associates, PA, Independent Accountants F-158
Balance Sheets as of December 31, 1993 and November 22, 1994 F-159
Statements of Income and Retained Earnings for the year ended December 31, 1993 and interim period
ending November 22, 1994 F-160
Statements of Cash Flows for the year ended December 31, 1993 and interim period ending November
22, 1994 F-161
Notes to Financial Statements F-162
WHITTLE, VARNELL AND BEDOYA, P.A.
Report of Arthur Andersen LLP, Independent Accountants F-164
Balance Sheets as of December 31, 1993 and 1994 and September 30, 1995 (unaudited) F-165
Statements of Operations and Retained Earnings for the years ended December 31, 1993 and
1994 and the nine month periods ended September 30, 1994 and 1995 (unaudited) F-166
Statements of Cash Flows for the years ended December 31, 1993 and 1994 and the nine month periods
ended September 30, 1994 and 1995 (unaudited) F-167
Notes to Financial Statements F-168
PINNACLE ASSOCIATES, INC.
Report of Coopers & Lybrand L.L.P., Independent Accountants F-173
Consolidated Balance Sheets as of September 30, 1995 (unaudited), December 31, 1994 and December
31, 1993 F-174
Consolidated Statements of Operations for the period January 1, 1995 to September 30, 1995
(unaudited), the year ended December 31, 1994 and the period October 21, 1993 (inception) to
December 31, 1993 F-175
Consolidated Statements of Stockholders' Deficit for the period January 1, 1995 to September 30,
1995 (unaudited), the year ended December 31, 1994 and the period October 21, 1993
(inception) to December 31, 1993 F-176
Consolidated Statements of Cash Flows for the period January 1, 1995 to September 30, 1995
(unaudited), the year ended December 31, 1994 and the period October 21, 1993 (inception) to
December 31, 1993 F-177
Notes to Consolidated Financial Statements F-178
</TABLE>
F-4
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
PHYMATRIX CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
Consolidated Consolidated Combined
April 30, January 31, December 31,
1996 1996 1995
----------- ----------- -------------
<S> <C> <C>
ASSETS (unaudited) (unaudited)
Current assets
Cash and cash equivalents $ 34,142,173 $ 46,113,619 $ 3,596,913
Receivables
Accounts receivable, net 24,447,358 21,562,477 20,710,846
Other receivables 179,513 678,411 569,923
Notes receivable -- -- 516,000
Prepaid expenses and other current assets 1,987,038 1,202,399 1,276,535
------------ ------------ ------------
Total current assets 60,756,082 69,556,906 26,670,217
Property, plant and equipment, net 39,087,961 38,719,086 39,359,328
Notes receivable 100,000 100,000 170,400
Goodwill, net 47,006,150 44,979,865 31,931,453
Management service agreements, net 16,574,707 15,816,042 16,376,636
Investment in affiliates 3,272,028 3,256,783 12,925,129
Other assets (including restricted cash) 7,623,278 7,578,791 4,753,710
------------ ------------ ------------
Total assets $174,420,206 $180,007,473 $132,186,873
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of debt and capital leases $ 2,334,188 $ 2,552,306 $ 26,662,510
Current portion of related party debt 2,435,294 4,740,588 4,740,588
Due to shareholder--current 5,376,000 5,376,000 --
Accounts payable 4,293,252 5,333,791 5,353,210
Accrued compensation 824,288 1,151,268 1,124,316
Accrued liabilities 5,392,961 6,194,108 9,367,532
Accrued interest--shareholder 228,480 -- 1,708,174
---------- ---------- ------------
Total current liabilities 20,884,463 25,348,061 48,956,330
Due to shareholder, less current portion 6,310,882 10,147,287 36,690,180
Long-term debt and capital leases, less
current portion 13,855,411 13,653,437 28,847,923
Other long term liabilities 2,127,632 2,314,544 2,511,122
Minority interest 1,730,630 1,335,167 2,502,970
---------- ---------- ------------
Total liabilities 44,909,018 52,798,496 119,508,525
Commitments and contingencies
Shareholders' equity:
Common Stock, par value $.01; 40,000,000
shares authorized; 21,529,950 shares issued
and outstanding at April 30, 1996 and
January 31, 1996 215,300 215,300 --
Additional paid in capital 140,502,110 140,491,557 25,000,000
Retained earnings (deficit) (11,206,222) (13,497,880) (12,321,652)
------------ ------------ ------------
Total shareholders' equity 129,511,188 127,208,977 12,678,348
------------ ----------- ------------
Total liabilities and shareholders' equity $174,420,206 $180,007,473 $132,186,873
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
PHYMATRIX CORP.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Consolidated
Three Consolidated Combined
Months One Month Three Months
Ended Ended Ended
---------- ----------- -------------
April 30, January 31, March 31,
1996 1996 1995
---------- ----------- -------------
<S> <C> <C> <C>
Net revenue from services $20,052,278 $ 4,636,127 $ 6,669,100
Net revenue from management service agreements 17,154,816 6,079,109 --
----------- ----------- -----------
Total revenue 37,207,094 10,715,236 6,669,100
----------- ----------- -----------
Operating costs and administrative expenses
Cost of affiliated physician management services 8,533,111 2,796,623 --
Salaries, wages and benefits 11,659,915 3,636,973 4,510,135
Professional fees 901,598 287,095 447,336
Supplies 5,482,904 1,916,013 601,479
Utilities 584,605 175,653 135,654
Depreciation and amortization 1,592,711 535,300 338,057
Rent 1,706,075 565,106 326,396
Earn out payment -- -- 1,111,111
Provision for bad debts 580,248 256,989 34,621
Other 2,308,679 799,460 1,043,757
----------- ----------- -----------
Total operating costs and administrative
expenses 33,349,846 10,969,212 8,548,546
Interest expense, net 40,991 551,607 287,480
Interest expense, shareholder 228,480 259,888 32,601
Minority interest 34,041 81,135 105,277
Income from investment in affiliates (141,947) 29,622 --
----------- ----------- -----------
Income (loss) before provision for income taxes 3,695,683 (1,176,228) (2,304,804)
Income tax expense 1,404,025 -- --
----------- ----------- -----------
Net income (loss) $ 2,291,658 $(1,176,228) $(2,304,804)
=========== =========== ===========
Net income (loss) per share $ 0.11 $ (0.08)
=========== ===========
Weighted average number of shares outstanding 21,529,950 14,204,305
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
PHYMATRIX CORP.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Consolidated
Three Consolidated Combined
Months One Month Three Months
Ended Ended Ended
----------- ----------- -------------
April 30, January 31, March 31,
1996 1996 1995
----------- ----------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 2,291,658 $ (1,176,228) $ (2,304,794)
Noncash items included in net income (loss):
Depreciation and amortization 1,592,711 535,300 338,057
Other (15,245) 430,334 (106,045)
Changes in receivables (3,214,260) (739,635) (836,249)
Changes in accounts payable and accrued liabilities (1,141,673) (796,011) 207,840
Changes in other assets (248,777) (19,072) (129,972)
--------- --------- -----------
Net cash used by operating activities (735,586) (1,765,312) (2,831,163)
--------- --------- -----------
Cash flows from investing activities
Capital expenditures (682,709) (184,460) (113,789)
Sale of assets -- 24,794 --
Repayment of notes receivable -- 686,400 --
Other assets (84,285) -- --
Acquisitions, net of cash acquired (2,738,114) 54,252 (16,601,955)
--------- --------- -----------
Net cash used by investing activities (3,505,108) 580,986 (16,715,744)
--------- --------- -----------
Cash flows from financing activities
Capital contributions -- -- 12,036,287
Advances from (repayment to) shareholder (3,836,405) (23,123,170) 9,482,556
Proceeds from issuance of common stock -- 114,563,221 --
Release of cash collateral -- 1,000,000 --
Cash collateralizing note payable -- (5,403,337) --
Offering costs (929,409) -- --
Other assets -- -- (222,500)
Repayment of debt (2,964,938) (43,335,682) (1,080,321)
--------- --------- -----------
Net cash provided (used) by financing activities (7,730,752) 43,701,032 20,216,022
--------- --------- -----------
Increase (decrease) in cash and cash equivalents (11,971,446) 42,516,706 669,115
Cash and cash equivalents, beginning of period 46,113,619 3,596,913 677,245
--------- --------- -----------
Cash and cash equivalents, end of period $ 34,142,173 $ 46,113,619 $ 1,346,360
========= ========= ===========
Supplemental disclosure of cash flow information
Cash paid during period for:
Interest $ 671,113 $ 2,876,636 $ 297,374
========= ========= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
PHYMATRIX CORP.
NOTES TO FINANCIAL STATEMENTS
Three Months Ended April 30, 1996, One Month Ended January 31, 1996 and
Three Months Ended March 31, 1995
(1) ORGANIZATION AND BASIS OF PRESENTATION (Unaudited)
The accompanying unaudited interim financial statements include the
accounts of PhyMatrix Corp. ("the Company") and the combination of business
entities which had been operated under common control. These interim
financial statements have been prepared in accordance with generally accepted
accounting principles and the requirements of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted. It
is management's opinion that the accompanying interim financial statements
reflect all adjustments (which are normal and recurring) necessary for a fair
presentation of the results for the interim periods. These interim financial
statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's Special Report on Form
10-K for the year ended December 31, 1995. Operating results for the three
months ended April 30, 1996 are not necessarily indicative of results that
may be expected for the year. In January 1996, the Company changed its fiscal
year end from December 31 to January 31 and the unaudited financial
statements as of and for the one month period ended January 31, 1996 are
included herein.
(2) INITIAL PUBLIC OFFERING
The Company filed a Registration Statement on Form S-1 with the Securities
and Exchange Commission in connection with an initial public offering ("IPO")
which became effective January 23, 1996. In connection with the IPO, the
Company issued 8,222,500 shares of Common Stock. Net proceeds to the Company
were $111,685,681, which was net of underwriting commissions and expenses.
The Company used approximately $71,500,000 from the net proceeds of the IPO
to repay certain indebtedness and obligations that arose from certain
acquisitions. The remaining net proceeds have and will continue to be used
for general corporate purposes, including future acquisitions and working
capital.
(3) ACQUISITIONS
During April 1996, the Company purchased a 50% interest in Central Georgia
Medical Management, LLC, a newly formed management services organization
("MSO") that provides management services to an independent physician
association ("IPA") composed of 45 physicians based in Georgia. The Company
acquired this interest in exchange for a payment of $550,000 to existing
shareholders and a capital contribution of $700,000 to the Company. The
Company's balance sheet at April 30, 1996 includes the 50% interest not owned
by the Company as minority interest. The owners of the other 50% interest in
the MSO have a put option to the Company to purchase their interests. This
put option vests over a four year period. The price to the Company to
purchase these interests equals 40% of the MSO's net operating income as of
the most recent fiscal year multiplied by the price earnings ratio of the
Company. The minimum price earnings ratio used in such calculation will be 4
and the maximum 10.
During April 1996, the Company purchased the assets of and entered into an
employment agreement with one physician in Florida. The total purchase price
for these assets was $1,631,699. The purchase price was allocated to these
assets at their fair market value including goodwill of $1,581,979. The
resulting intangible is being amortized over 20 years.
During the three months ended April 30, 1996 and March 31, 1995 the
Company acquired the assets and assumed certain liabilities of physician
practices, medical support service companies and management service
organizations. The transactions had the following non-cash impact on the
balance sheets:
F-8
<PAGE>
PHYMATRIX CORP.
NOTES TO FINANCIAL STATEMENTS
Three Months Ended April 30, 1996, One Month Ended January 31, 1996 and
Three Months Ended March 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
April
30, March 31,
1996 1995
-------- -------------
<S> <C> <C>
Current assets $ -- $ 3,548,797
Property, plant and equipment 693,220 27,028,456
Intangibles 3,038,394 8,696,178
Other noncurrent assets -- 1,185,774
Current liabilities -- (2,597,623)
Debt (643,500) (19,470,992)
Noncurrent liabilities (350,000) (1,788,635)
</TABLE>
(4) LONG TERM DEBT
During January 1996, the Company used approximately $71,500,000 from the
proceeds of the IPO, to repay the following indebtedness and obligations of
the Company that arose from certain acquisitions: (i) a promissory note to
Aegis Health Systems, Inc. in the amount of $3,796,503 (including interest);
(ii) a contingent note to the shareholders of Nutrichem, Inc., net of a tax
loan receivable due from the shareholders, in the amount of $3,854,595
(including interest); (iii) a note payable to a financing institution in
connection with the purchase of Oncology Therapies, Inc. in the amount of
$15,585,023 (including interest); (iv) a note payable to NationsBank of
Florida, N.A. in the amount of $19,586,531 (including interest); and (v) a
partial payment of $28,676,743 on the note payable to Abraham D. Gosman, the
Company's President, Chief Executive Officer, Chairman and principal
stockholder.
During April 1996, the Company repaid $2,305,294 of related party
indebtedness to one of the shareholders of DASCO Development Corporation.
(5) RELATED PARTY TRANSACTIONS
During the three months ended April 30, 1996, the Company contracted with
an entity principally owned by the Company's Chairman of the Board, President
and Chief Executive Officer to provide construction management, development,
marketing and consulting services for a medical mall being constructed by
such entity. During the three months ended April 30, 1996 the Company
recorded revenues in the amount of $304,020 related to such services.
(6) SUBSEQUENT EVENTS
During May 1996, the Company received a commitment from PNC Bank, National
Association, for a $30 million revolving credit facility and anticipates
closing on this financing on or about June 30, 1996.
During May 1996, the Company purchased the stock of Atlanta
Gastroenterology Associates, P.C. pursuant to a tax free merger and entered
into a 40-year management agreement with the medical practice in exchange for
324,252 shares of Common Stock of the Company having a value of approximately
$6,100,000. The transaction will be accounted for using the
pooling-of-interests method of accounting. Pursuant to the management
agreement, the Company will receive a base management fee, an incentive
management fee, and a percentage of all net ancillary service income.
During May 1996, the Company amended its existing management agreement
with Oncology Care Associates and extended the term of the agreement to 20
years. Simultaneously, the Company expanded the Oncology Care Associates
practice by adding three oncologists the practices of whom the Company
acquired for $500,000. $200,000 of such purchase price was paid in cash and
$300,000 was paid in the form of a convertible note with a maturity in May
1997. The Company has the option to make such $300,000 payment at its
discretion in either cash or Common Stock of the Company with such number of
shares to be based upon the average price of the stock during the five
business days preceding such date. The purchase price will be allocated to
the assets at their fair
F-9
<PAGE>
PHYMATRIX CORP.
NOTES TO FINANCIAL STATEMENTS
Three Months Ended April 30, 1996, One Month Ended January 31, 1996 and
Three Months Ended March 31, 1995
(Unaudited)
market value, including management service agreements of approximately
$500,000. The Company will receive an annual base management fee and an
incentive management fee. The resulting intangible will be amortized over 20
years.
Subsequent to April 30, 1996, the Company has entered into agreements to
purchase the assets of and enter into 20-year management agreements with
three physician practices consisting of four physicians. Two of these
agreements have closed in escrow pending the satisfaction of certain
conditions. These practices are located in South Florida, Bethesda, Maryland
and Washington, D.C. The total purchase price for the assets of these
practices was $1,520,530. Of this amount $585,416 was paid in cash and
$935,114 of such purchase price is payable in Common Stock of the Company to
be issued during May and June 1997. The number of shares of Common Stock of
the Company to be issued is based upon the average price of the stock during
the five business days prior to the issuance. The purchase price will be
allocated to the assets at their fair market value, including management
service agreements of approximately $1,155,871. The Company will receive an
annual base management fee and an incentive management fee for each
agreement. The resulting intangible will be amortized over 20 years.
During June 1996, the Company announced that it intends, subject to market
and other conditions, to raise $100 million through the sale of convertible
subordinated debentures to certain institutional investors and non-U.S.
investors and up to $15 million if an over-allotment option to be granted is
exercised in full. The debentures will be convertible into shares of the
Company's Common Stock. The securities to be offered will not be registered
under the Securities Act of 1933, as amended, or applicable state securities
laws, and may not be offered or sold absent registration under the Securities
Act and applicable state securities laws or available exemptions from
registrations.
F-10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of PhyMatrix Corp. (formerly known as Continuum Care
Corporation):
We have audited the accompanying combined balance sheets of PhyMatrix
Corp. (formerly known as Continuum Care Corporation) as of December 31, 1995
and December 31, 1994 and the related combined statements of operations,
changes in shareholders' equity and cash flows for the year ended December
31, 1995 and the period from June 24 (inception) to December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of PhyMatrix Corp.
(formerly known as Continuum Care Corporation) as of December 31, 1995 and
December 31, 1994 and the combined results of its operations and its cash
flows for the year ended December 31, 1995 and the period from June 24
(inception) to December 31, 1994 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 27, 1996
F-11
<PAGE>
PHYMATRIX CORP.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
December December
31, 31, December 31,
1995 1995 1994
----------- ----------- -------------
(Unaudited)
(Note 20)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 43,322,227 $ 3,596,913 $ 677,245
Receivables
Accounts receivable, net of allowance for doubtful
accounts of $7,819,577 and $962,641 at December 31,
1995 and 1994, respectively 20,710,846 20,710,846 3,778,467
Other receivables 1,210,414 569,923 --
Notes receivable (Note 4) -- 516,000 --
Prepaid expenses and other current assets 1,289,227 1,276,535 393,126
------------ ------------ -----------
Total current assets 66,532,714 26,670,217 4,848,838
Property, plant and equipment, net (Note 5) 39,429,918 39,359,328 1,686,624
Notes receivable (Note 4) -- 170,400 --
Goodwill, net (Note 6) 44,439,219 31,931,453 6,210,679
Management service agreements, net (Note 7) 16,376,636 16,376,636 --
Investment in affiliates (Note 8) 3,387,820 12,925,129 2,661,511
Other assets (including restricted cash) 7,035,497 4,753,710 --
------------ ------------ -----------
Total assets $177,201,804 $132,186,873 $ 15,407,652
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of debt and capital leases (Note 10) $ 2,962,636 $ 26,662,510 $ 457,250
Current portion of related party debt (Note 10) 4,740,588 4,740,588 --
Accounts payable 5,398,411 5,353,210 693,171
Accrued compensation 1,194,424 1,124,316 205,288
Accrued liabilities (Note 9) 4,238,994 9,367,532 902,900
Accrued interest -- shareholder (Note 13) -- 1,708,174 --
------------ ------------ -----------
Total current liabilities 18,535,053 48,956,330 2,258,609
Due to shareholder (Note 3 and 13) 10,751,764 36,690,180 --
Long-term debt and capital leases, less current
maturities (Note 10) 13,942,113 28,847,923 911,534
Other long term liabilities (Note 9) 3,710,045 2,511,122 --
Minority interest 1,305,758 2,502,970 570,533
------------ ------------ -----------
Total liabilities 48,244,733 119,508,525 3,740,676
Commitments and contingencies (Note 12)
Shareholders' equity
Additional paid in capital 141,485,681 25,000,000 12,963,713
Retained earnings (deficit) (12,528,610) (12,321,652) (1,296,737)
------------ ------------ -----------
Total shareholders' equity 128,957,071 12,678,348 11,666,976
------------ ------------ -----------
Total liabilities and shareholders' equity $177,201,804 $132,186,873 $15,407,652
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-12
<PAGE>
PHYMATRIX CORP.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period From
June 24
(inception)
Year Ended to
December 31, December 31,
1995 1994
------------ -------------
<S> <C> <C>
Net revenue from services $ 48,360,716 $ 2,446,821
Net revenue from management service agreements 22,372,566 --
------------ -----------
Total revenue 70,733,282 2,446,821
------------ -----------
Operating costs and administrative expenses
Cost of affiliated physician management services 9,655,973 --
Salaries, wages and benefits 29,708,554 1,207,750
Salaries, wages and benefits -- related party (Note 13) 2,267,891 934,200
Professional fees 2,571,459 58,665
Professional fees -- related party (Note 13) 273,941 253,995
Supplies 11,864,514 404,911
Utilities 1,307,564 77,416
Depreciation and amortization 3,862,519 107,387
Rent 4,043,465 56,244
Rent -- related party (Note 13) 459,732 192,242
Earn out payment (Note 3) 1,271,000 --
Provision for closure loss (Note 3) 2,500,000 --
Provision for bad debts 744,111 --
Other 5,409,676 53,665
Other -- related party (Note 13) 728,116 249,316
------------ -----------
Total operating costs and administrative expenses 76,668,515 3,595,791
Interest expense, net 3,144,027 95,069
Interest expense -- shareholder (Note 13) 1,708,174 --
Minority interest 806,637 52,698
Income from investment in affiliates (569,156) --
------------ -----------
Loss (Note 2) $(11,024,915) $(1,296,737)
============ ===========
Loss per pro forma share $ (0.98) $ (0.12)
============ ===========
Number of shares used in loss per pro forma share 11,207,450 11,207,450
============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-13
<PAGE>
PHYMATRIX CORP.
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the year ended December 31, 1995
and the period June 24 (inception) to December 31, 1994
<TABLE>
<CAPTION>
Retained
Additional Earnings
Paid-In (Accumulated
Capital Deficit) Total
---------- ------------ -------------
<S> <C> <C> <C>
Balances -- June 24, 1994 -- -- --
Capital contribution $12,963,713 -- $ 12,963,713
Loss for the period June 24, 1994 (inception)
to December 31, 1994 -- ($ 1,296,737) (1,296,737)
----------- ------------ ------------
Balances -- December 31, 1994 12,963,713 (1,296,737) 11,666,976
Capital contribution 12,036,287 -- 12,036,287
Loss for the year ended December 31, 1995 -- (11,024,915) (11,024,915)
----------- ------------ ------------
Balances -- December 31, 1995 $25,000,000 $(12,321,652) $ 12,678,348
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-14
<PAGE>
PHYMATRIX CORP.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period From
June 24
(inception)
Year Ended to
December 31, December 31,
1995 1994
------------ -------------
<S> <C> <C>
Cash flows from operating activities
Loss $(11,024,915) $ (1,296,737)
Noncash items included in net loss:
Depreciation and amortization 3,862,519 107,387
Writedown of assets 1,554,607 --
Other 140,151 --
Changes in receivables (5,419,998) (389,442)
Changes in accounts payable and accrued liabilities 8,221,039 242,612
Changes in other assets (1,425,016) 2,473
------------ ------------
Net cash used by operating activities (4,091,613) (1,333,707)
------------ ------------
Cash flows from investing activities
Capital expenditures (1,167,230) (107,348)
Notes receivable (1,029,600) --
Repayments on notes receivable 343,200 --
Purchase of investments in affiliates (9,790,588) (2,661,511)
Other assets (20,287) --
Acquisitions, net of cash acquired (Note 17) (44,365,741) (8,183,902)
------------ ------------
Net cash used by investing activities (56,030,246) (10,952,761)
------------ ------------
Cash flows from financing activities
Capital contributions 12,036,287 12,963,713
Advances of funds from shareholder 36,690,180 --
Offering costs (1,030,632) --
Proceeds from issuance of debt 19,143,127 --
Repayment of debt (3,797,435) --
------------ ------------
Net cash provided by financing activities 63,041,527 12,963,713
------------ ------------
Increase in cash and cash equivalents 2,919,668 677,245
Cash and cash equivalents, beginning of period 677,245 --
------------ ------------
Cash and cash equivalents, end of period $ 3,596,913 $ 677,245
============ ============
Supplemental disclosure of cash flow information
Cash paid during period for:
Interest $ 2,754,082 $ --
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-15
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION
PhyMatrix Corp. (the "Company"), formerly known as Continuum Care
Corporation, was formed to create a health care company which consummated an
Initial Public Offering (the "offering") during January 1996 (see Note 19)
and simultaneously exchanged shares of its common stock for all of the
outstanding common stock of several business entities (the "IPO entities")
which have been operated under common control by Mr. Gosman and for DASCO
Development Corporation and Affiliate (collectively, "DASCO"), by Messrs.
Gosman, Rendina and Sands, (collectively Principal Shareholders of the
Company) since their respective dates of acquisition (see Note 3). The IPO
entities are as follows:
DASCO Development Corporation and Affiliate
CCC-Infusion, Inc.
Nutrichem, Inc.
First Choice Health Care Services of Ft. Lauderdale, Inc.
First Choice Home Care, Inc.
First Choice Health Care Services, Inc.
CCC-Indiana Lithotripsy, Inc.
Lithotripsy America, Inc.
CCC National Lithotripsy, Inc.
CCC-Lithotripsy, Inc.
Oncology Therapies of America, Inc.
Phychoice, Inc.
Each of the acquisitions of the business entities, except where noted in
Note 3, was accounted for under the purchase method of accounting and was
recorded at the price paid by Mr. Gosman when he purchased the entities from
a third party. The audited combined financial statements for the period June
24, 1994 (inception) through December 31, 1994 and the year ended December
31, 1995 have been prepared to reflect the combination of these business
entities which have operated since their purchase date under common control.
These combined financial statements have been prepared to reflect the
combination of business entities which have been operated under common
control. Because certain of these entities operated under common control are
nontaxpaying (i.e., primarily S Corporations which results in taxes being the
responsibility of the respective owners), the financial statements have been
presented on a pretax basis, as further described in Note 2.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Estimates Used in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
are used when accounting for the collectibility of receivables and third
party settlements, depreciation and amortization, taxes and contingencies.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid instruments with
original maturities at the time of purchase of three months or less.
Revenue Recognition
Net revenue from services is reported at the estimated realizable amounts
from patients, third-party payors and others for services rendered. Revenue
under certain third-party payor agreements is subject to audit and
retroactive adjustments. Provisions for estimated third-party payor
settlements and adjustments are estimated in
F-16
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
the period the related services are rendered and adjusted in future periods
as final settlements are determined. The provision and related allowance are
adjusted periodically, based upon an evaluation of historical collection
experience with specific payors for particular services, anticipated
reimbursement levels with specific payors for new services, industry
reimbursement trends, and other relevant factors.
Net revenues from management service agreements include the contractual
fees earned (which equal the net revenue generated by the physician
practices) under its management services agreements with physicians. Under
the agreements, the Company is contractually responsible and at risk for the
operating costs of the medical groups. The costs include the reimbursement of
all medical practice operating costs and the fixed and variable contractual
management fees (which are reflected as cost of affiliated physician
management services) as defined and stipulated in the agreements.
Accounts receivable, net at December 31, 1995 equaled $20,710,846 which
was 29.3% of total revenue of $70,733,282 for the year ending December 31,
1995. During the year ended December 31, 1995 the Company acquired several
businesses (see Note 3). The historical results of operations do not include
the revenues from such acquisitions prior to their purchase by the Company.
These result in accounts receivable equaling 29.3% of total revenues for the
year ended December 31, 1995. On an annualized basis, the accounts receivable
balance at December 31, 1995 would represent a much smaller percentage of
revenues and is not considered to be unusual for these types of businesses.
Third Party Reimbursement
For the year ended December 31, 1995 and for the period from June 24, 1994
(inception) to December 31, 1994, approximately 40% and 34%, respectively, of
the Company's net revenue was primarily from the participation of the
Company's home health care entities and physician practices in Medicare
programs. Medicare compensates the Company on a "cost reimbursement" basis
for home health care, meaning Medicare covers all reasonable costs incurred
in providing home health care. Medicare compensates the Company for physician
services based on predetermined fee schedules. In addition to extensive
existing governmental health care regulation, there are numerous initiatives
at the federal and state levels for comprehensive reforms affecting the
payment for and availability of health care services. Legislative changes to
federal or state reimbursement systems could adversely and retroactively
affect recorded revenues.
Property and Equipment
Additions are recorded at cost and depreciation is recorded principally by
use of the straight-line method of depreciation for buildings, improvements
and equipment over their useful lives. Upon disposition, the cost and related
accumulated depreciation are removed from the accounts and any gain or loss
is included in income. Maintenance and repairs are charged to expense as
incurred. Major renewals or improvements are capitalized. Assets recorded
under capital leases are amortized over their estimated useful lives for the
lease terms, as appropriate.
Income Taxes
Certain of the entities to be purchased by the Company are S Corporations
or partnerships; accordingly, income tax liabilities are the responsibility
of the respective owners or partners. Provisions for income taxes and
deferred assets and liabilities of the taxable entities have not been
reflected in these combined financial statements since there is no taxable
income on a combined basis.
Goodwill
Goodwill relates to the excess of cost over the value of net assets of the
businesses acquired. Amortization is calculated on a straight line basis over
periods ranging from ten to forty years. The overall business strategy of the
Company includes the acquisition and integration of independent physician
practices and medical support
F-17
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
services. The Company will also utilize its medical facility development
services to further promote affiliations and acquisitions. The Company
believes that this strategy creates synergies, achieves operating
efficiencies and responds to the cost containment objectives of payors, all
of which will provide benefits for the foreseeable future. The Company has
initiated the implementation of this strategy through the acquisition of
DASCO which provides medical facility development services, the acquisition
of OTI (as defined below) which provides radiation therapy and diagnostic
imaging services, the acquisition of oncology practices and medical support
service companies (such as Nutrichem) and the affiliation with oncologists.
Periodically management assesses, based on undiscounted cash flows, if there
has been a permanent impairment in the carrying value of its goodwill and, if
so, the amount of any such impairment by comparing anticipated discounted
future operating income from acquired businesses with the carrying value of
the related goodwill. In performing this analysis, management considers such
factors as current results, trends and future prospects, in addition to other
economic factors.
The Company is required to implement Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" in 1996. As the Company currently
continually evaluates the realizability of its long-lived assets, including
goodwill and intangibles, adoption of the statement is not anticipated to
have a material effect on the Company's financial statements at the date of
adoption.
Management Service Agreements
Management service agreements consist of the costs of purchasing the
rights to manage medical oncology and physician groups. These costs are
amortized over the initial noncancelable terms of the related management
service agreements ranging from 10 to 20 years. Under the long-term
agreements, the medical groups have agreed to provide medical services on an
exclusive basis only through facilities managed by the Company. The
agreements are noncancelable except for performance defaults. In the event a
medical group breaches the agreement, or if the Company terminates with
cause, the medical group is required to purchase all related assets,
including the unamortized portion of any intangible assets, including
management service agreement, at the then net book value.
Investments
The equity method of accounting is used for investments when there exists
a noncontrolling ownership interest in another company that is greater than
20%. Under the equity method of accounting, original investments are recorded
at cost and adjusted by the Company's share of earnings or losses of such
companies, net of distributions.
3. ACQUISITIONS
The following table sets forth the acquisitions made by the Company as of
December 31, 1995, with the respective purchase dates, purchase prices, and
amounts allocated to intangibles:
<TABLE>
<CAPTION>
Amounts Allocated
to Intangibles
-----------------------
Management
Date Purchase Service
Business Acquired Purchased Price Goodwill Contracts
---------------------------------------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Employed physicians (A) Various through $3,700,783 $2,595,178 $--
November 1995
Medical support service companies:
(bullet) Uromed Technologies, Inc. September 1994 3,661,751 2,375,914 --
(bullet) Nutrichem, Inc. November 1994 8,924,371 7,007,833 --
(bullet) First Choice Home Care Services of Boca Raton, Inc. November 1994 2,910,546 2,622,061 --
(bullet) First Choice Health Care Services of Ft. Lauderdale, Inc.
</TABLE>
F-18
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
3. ACQUISITIONS (Continued)
<TABLE>
<CAPTION>
Amounts Allocated
to Intangibles
-----------------------
Management
Date Purchase Service
Business Acquired Purchased Price Goodwill Contracts
- ---------------------------------------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C>
(bullet) First Choice Health Care Services, Inc.
(bullet) Mobile Lithotripter of Indiana Partners December 1994 $ 2,663,000 $ -- $ --
(bullet) Radiation Care, Inc. and Subsidiaries March 1995 41,470,207 8,418,160 --
(bullet) Aegis Health Systems, Inc. April 1995 7,162,375 6,227,375 --
(bullet) Phylab October 1995 130,653 111,813 --
(bullet) Pinnacle November 1995 --(B) 382,139 --
Managed physician practices:
(bullet) Georgia Oncology-Hematology Clinic, P.C. April 1995 2,099,353 -- 645,448
(bullet) Oncology-Hematology Associates P.A. July 1995 1,541,523 -- 312,740
and Oncology-Hematology Infusion Therapy, Inc.
(bullet) Cancer Specialists of Georgia, Inc. August 1995 5,735,571 -- 2,373,508
(bullet) Oncology & Radiation Associates, P.A. September 1995 10,784,648 -- 9,579,424
(bullet) Osler Medical September 1995 5,792,160 -- 3,373,025
(bullet) West Shore Urology October 1995 550,859 -- --
(bullet) Whittle, Varnell and Bedoya, P.A. November 1995 909,084 -- 212,937
(bullet) Oncology Care Associates November 1995 486,947 -- 1,894
(bullet) Symington December 1995 102,106 -- 10,006
(bullet) Venkat Mani December 1995 401,372 -- 98,782
Medical facility development:
(bullet) DASCO Development Corporation and
Affiliate (50% interest) May 1995 9,610,588(C) -- --
Management Services Organization:
(bullet) Physicians Choice Management, LLC December 1995 3,850,000 2,975,000 --
</TABLE>
- -------------
(A) Includes Drs. Bansal, Mistry, Dandiya, Canasi, Alpert, Hunter, Jaffer,
Cano, Herman, Barza and Novoa.
(B) Entire purchase price is contingent and is based on earnings with a
maximum purchase price of $5.2 million.
(C) See Medical Facility Development Acquisitions.
Physician Practice Acquisitions
During the year ended December 31, 1995, the Company purchased the assets
of Drs. Bansal, Mistry, Dandiya, Canasi, Alpert, Hunter, Jaffer, Cano,
Herman, Barza and Novoa and in conjunction with those purchases entered into
employment agreements with 14 physicians in Florida. The total purchase price
for these assets was $3,700,783. The purchase price was allocated to these
assets at their fair market value, including goodwill of $2,595,178. The
resulting goodwill is being amortized over twenty years.
During July 1995, the Company purchased the assets of and entered into a
15-year management agreement with Oncology-Hematology Associates, P.A. and
Oncology-Hematology Infusion Therapy, Inc. a medical oncology practice in
Baltimore, Maryland with three medical oncologists. The purchase price for
these assets was approximately $1,541,523 in cash. An affiliate of the
Company guarantees the performance of the Company's obligations under the
management agreement. For its management services, the Company will receive
41.6% of the net revenues of the practice less the salaries and benefits of
medical personnel whose services are billed incident to the practice of
medicine and which are employed by the practice. The Company has guaranteed
that the minimum amount that will be retained by the practice for each of the
first eight years will be $1,627,029 and for each of years
F-19
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
3. ACQUISITIONS (Continued)
nine and ten will be $1,301,619. The purchase price was allocated to the
assets at their fair market value, including management service agreements of
approximately $312,740. The resulting intangible is being amortized over
fifteen years.
During August 1995, the Company purchased the assets of Cancer Specialists
of Georgia, Inc. a medical oncology practice with 11 oncologists in Atlanta,
Georgia. The purchase price for these assets was approximately $5,735,571 in
cash. In addition, during April 1995, the Company purchased the assets of and
entered into a ten-year management agreement with Georgia Oncology-Hematology
Clinic, P.C. a medical oncology practice with eight oncologists in Atlanta,
Georgia. The purchase price for these assets was approximately $2,099,353 in
cash. During August 1995, these two medical oncology practices consolidated
and formed a new entity, Georgia Cancer Specialists, Inc. The Company entered
into a new ten-year management agreement with the consolidated practice
during August 1995. For its services under this management agreement, the
Company receives 41.5% of the net practice revenues less the cost of
pharmaceutical and/or ancillary products. In each of the second through fifth
years of the term of this agreement, the fee payable to the Company is
decreased by 1%. The Company also purchased for $180,000 a 46% interest in I
Systems, Inc., a company affiliated with one of the practices which is
engaged in the business of claims processing and related services. The
purchase of this 46% interest is being accounted for by the equity method.
The Company has the option to purchase up to an additional 30% interest in
the affiliated Company for $33,333 in cash for each additional one percent of
ownership interest purchased. The Company and the affiliated company entered
into a three-year service agreement pursuant to which certain billing and
collection services will be provided to the Company. The purchase price of
the above acquisitions was allocated to the assets at their fair market
value, including management service agreements of $3,018,956. The resulting
intangible is being amortized over ten years.
During September 1995, the Company purchased the assets of and entered
into a 20-year management agreement with Osler Medical, Inc., a 22 physician
multi-specialty group practice in Melbourne, Florida. The purchase price for
these assets was approximately $4,301,888 plus the assumption of debt of
$1,490,272. The Company also entered into a 20-year capital lease for the
main offices of the practice with a total obligation of $6,283,483. An
affiliate of the Company has provided a guarantee of such payments under the
lease. During the first five years of the management agreement, the Company
will receive a management fee equal to 45% of the annual net revenues of the
practice. Thereafter, the management fee increases to 47% of annual net
revenues. The management fee percentage for net revenues of the initial
physician group will be reduced based upon a set formula to a minimum of 31%
based upon the achievement of certain predetermined benchmarks. The
management agreement also provides that, during the period from January 1,
1996 through December 31, 2005, to the extent annual net revenues of the
practice are less than $10,838,952, the Company's management fee is reduced
up to a maximum reduction of $1,500,000 per year. The Company has agreed to
expend up to $1,500,000 per year for each of the first three years of the
management agreement to assist in the expansion activities of the practice.
The Company also has agreed that on the earlier of the second anniversary of
the Company's acquisition of the practice or 120 days after the offering, it
will acquire certain copyright and trademark interests for a purchase price
equal to the lesser of $887,000 or the fair market value thereof. The
purchase price for the practice's assets acquired to date was allocated to
such assets at their fair market value, including management service
agreements of $3,373,025. The resulting intangible is being amortized over
twenty years.
During September 1995, the Company purchased the assets of and entered
into a 20-year management agreement with Oncology & Radiation Associates,
P.A. a medical oncology practice with 19 oncologists in South Florida. The
purchase price for these assets was $5,381,311 in cash plus the assumption of
debt of $5,403,337. The debt is collateralized by an irrevocable letter of
credit issued by NationsBank of Florida, N.A. ("NationsBank"), the collateral
for which had been provided by Mr. Gosman prior to the offering. The
management fee paid to the Company for services rendered has two components:
a base management fee and a variable management fee. The
F-20
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
3. ACQUISITIONS (Continued)
base management fee is $2,100,000 per year, subject to adjustment to an
amount not less than $1,350,000 during the first five years of the agreement
and not less than $700,000 thereafter. The variable management fee is equal
to 35.5% of certain revenues, subject to increase in certain circumstances.
The purchase price for the practice's assets was allocated to the assets at
their fair market value, including management service agreements of
$9,579,424. The resulting intangible is being amortized over twenty years.
During the fourth quarter of 1995, the Company entered into management
service agreements with West Shore Urology; Whittle, Varnell and Bedoya,
P.A.; Oncology Care Associates; Venkat Mani; and Symington consisting of 14
physicians including two oncologists. The total purchase price for these
assets was $2,450,368 in cash. The Company also entered into a 15-year
capital lease with a total obligation of $1,569,171. The purchase price was
allocated to assets at their fair market value, including management service
agreements of $323,619. The resulting intangible is being amortized over ten
to twenty years.
Medical Support Service Companies Acquisitions
During September 1994, an 80% owned subsidiary of the Company purchased
substantially all of the assets of Uromed Technologies, Inc., a provider of
lithotripsy services in Florida, for a Base Purchase Price of $2,564,137 plus
the assumption of capital lease obligations of $1,097,614. The Final Purchase
Price equals the Base Purchase Price plus the amount by which Stockholders'
Equity exceeded $450,000 on the Closing Date. A Final Purchase Price payment
of $283,000 was accrued at December 31, 1994 and paid during May 1995. The
former shareholders of Uromed will also receive an earnings contingency
payment of $274,000 which has been accrued at December 31, 1995. The
acquisition was accounted for under the purchase method of accounting. The
purchase price was allocated to assets at their fair market value including
goodwill of $2,375,914. The resulting intangible is being amortized over
twenty years. The Company intends to acquire the outstanding 20% interest in
the subsidiary.
During November 1994, the Company purchased 80% of the stock of Nutrichem,
Inc. ("Nutrichem"), an infusion therapy company doing business in Maryland,
Virginia and the District of Columbia, for $3,528,704 in cash and a
contingent note in the amount of $6,666,667, subject to adjustments. During
the year ended December 31, 1995, the Company made payments on the contingent
note of $2,657,732 (including interest of $435,510). Subsequent to the
offering, the contingent note (which had an outstanding principal balance of
$4,444,444 at December 31, 1995) was paid from the net proceeds of the
offering. A charge of $1,271,000 related to this contingent note has been
recorded during the year ended December 31, 1995. The remaining $5,395,667
has been allocated to goodwill at December 31, 1995 and will be amortized
prospectively. The purchase price was allocated to assets at the fair market
value including total goodwill of $7,007,833. The resulting intangible is
being amortized over forty years. Subsequent to the offering, the Company
acquired the outstanding 20% interest in Nutrichem in exchange for 266,666
shares of Common Stock.
During November 1994, the Company acquired all of the assets and assumed
certain liabilities of First Choice Health Care Services of Ft. Lauderdale,
Inc., First Choice Health Care Services, Inc. and First Choice Home Care
Services of Boca Raton, Inc., home health care companies doing business in
Florida, for a total purchase price of $2,910,546 in cash. The purchase price
was allocated to assets at the fair market value, including goodwill of
$2,622,061. The resulting intangible is being amortized over twenty years.
During December 1994, the Company purchased a 36.8% partnership interest
in Mobile Lithotripter of Indiana Partners, a provider of lithotripsy
services in Indiana, from Mobile Lithotripter of Indiana, Limited, for
$2,663,000 in cash. This investment is being accounted for by the equity
method.
During March 1995, the Company acquired by merger all of the outstanding
shares of stock of Oncology Therapies, Inc. (formerly known as Radiation
Care, Inc. and referred to herein as "OTI") for $2.625 per share. OTI owns
and operates outpatient radiation therapy centers utilized in the treatment
of cancer and diagnostic imaging
F-21
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
3. ACQUISITIONS (Continued)
centers. OTI's centers are located in Alabama, California, Florida, Georgia,
North Carolina, South Carolina, Tennessee and Virginia. The total purchase
price for the stock (not including transaction costs and 26,800 shares
subject to appraisal rights) was approximately $41,470,207. The purchase
price was paid by a combination of cash on hand, loans from Mr. Gosman and
net proceeds from long term debt financing of approximately $17,278,000. The
long term debt financing was paid in full during January 1996 with the
proceeds of the offering. The Company has established a plan to close five of
OTI's radiation therapy centers and has accrued approximately $3,134,028
primarily as a reserve for the estimated amount of the remaining lease
obligation. Of this amount $2,188,635 was recorded as an adjustment to the
purchase price and $945,393 was recorded as a charge in the fourth quarter of
1995. In addition, the Company also recorded a charge during the fourth
quarter of 1995 of $1,554,607, which represents the writedown of assets to
their estimated fair market value. The purchase price paid in connection with
the OTI merger was allocated to assets at their fair market value, including
goodwill of $8,418,160. The resulting intangible is being amortized over
forty years.
During April 1995, the Company purchased from Aegis Health Systems, Inc.
("Aegis") for $7,162,375 all of the assets used in its lithotripsy services
business. The purchase price consisted of approximately $3,591,967 in cash
and $3,570,408 in a promissory note. The outstanding principal balance and
any unpaid interest became due and payable upon the closing of the offering
and was paid in full during January 1996. The obligations, evidenced by the
promissory note, were secured by $1,000,000 which was in escrow and included
in other assets at December 31, 1995. The acquisition was accounted for under
the purchase method of accounting. The purchase price was allocated to assets
at their fair market value including goodwill of $6,227,375. The resulting
intangible is being amortized over twenty years.
During November 1995 the Company acquired by merger Pinnacle Associates,
Inc. ("Pinnacle"), an Atlanta, Georgia infusion therapy services company. In
connection with the Pinnacle merger there is a $5,200,000 maximum payment
that may be required to be paid that is based on earnings and will be made in
the form of shares of Common Stock of the Company valued as of the earnings
measurement date. At December 31, 1995 the contingent payment has not been
earned. The contingent consideration represents the full purchase price. On
the merger date, the liabilities assumed exceeded the fair market value of
the assets acquired by approximately $382,139 and such amount was recorded as
goodwill and is being amortized over forty years.
Management Services Organization
During December 1995, the Company obtained a 43.75% interest in Physicians
Choice Management, LLC, a newly formed management services organization
("MSO") that provides management services to an independent physician
association ("IPA") composed of over 275 physicians based in Connecticut. The
Company acquired this interest in exchange for a payment of $1.0 million to
existing shareholders, a payment of an additional $500,000 to existing
shareholders during the next six months (which has been included in accrued
liabilities at December 31, 1995), a capital contribution of $1.5 million to
the Company and a commitment to make an additional $500,000 capital
contribution during the next six months. The balance sheet includes the
56.25% interest not owned by the Company as minority interest. The Company
also has an option, which expires in May 1998, to increase its ownership in
the MSO to 50% for an additional investment of $2.0 million, of which $1.0
million would represent an additional capital contribution to the MSO and
$1.0 million would represent the purchase of additional units currently owned
by the IPA. The Company has paid a nonrefundable amount of $350,000 for such
option. In addition, the owners of the other 50% interest in the MSO have a
put option to the Company to purchase their interests. This put option vests
over a four year period. The price to the Company to purchase these interests
shall equal 40% of the MSO's net operating income as of the most recent
fiscal quarter multiplied by the price earnings ratio of the Company. In
addition, upon the IPO the Company granted options to purchase 300,000 shares
of Common Stock to certain MSO employees in conjunction with their employment
agreements. These options vest over a two year period with the exercise price
equaling the fair market value of the Company's stock on the date such shares
become exercisable.
F-22
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
3. ACQUISITIONS (Continued)
Medical Facility Development Acquisitions
On May 31, 1995, Mr. Gosman purchased for $9.6 million a 50% ownership
interest in DASCO, a medical facility development services company providing
such services to related and unrelated third parties in connection with the
development of medical malls, health parks and medical office buildings. The
purchase price consisted of $5.0 million in cash and $4.6 million in notes,
which are guaranteed by Mr. Gosman. Upon the closing of the offering, Messrs.
Gosman, Sands and Rendina, the Company's principal promoters, and certain
management and founder stockholders exchanged their ownership interests in
DASCO for shares of Common Stock equal to a total of $55 million or 3,666,667
shares. The Company believes that its medical facility development services
and project finance strategy are a significant component of the Company's
overall business strategy. The historical book value of Messrs. Sands and
Rendina's interest in DASCO is $22,735. The initial 50% purchase price was
and will be allocated to assets at their fair market value, primarily
goodwill of $9.6 million with the exchange recorded at historical value. At
December 31, 1995 DASCO is being accounted for using the equity method (see
Note 8).
4. NOTES RECEIVABLE
During April 1995, the Company funded a tax loan in the amount of
$1,029,600 to the former Shareholders of Nutrichem. The tax loan was
required, pursuant to the terms of the Purchase Agreement, to convert the
books from the cash basis to the accrual basis prior to the closing. The loan
bears interest at 7.75% per annum and payments are due in six installments at
$172,000 per installment on May 1 and October 1, 1995 and April 1 and October
1 of each year thereafter until October 1, 1997. The tax loan was paid in
full during January 1996.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
Estimated
Useful
Life December 31,
------------------------
(Years) 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Building 15 - 20 $ 7,852,653 $ --
Furniture and fixtures 5 - 7 5,312,385 154,999
Equipment 7 - 10 21,789,876 1,583,574
Automobiles 3 - 5 50,058 --
Computer software 5 950,346 14,699
Leasehold improvements 4 - 20 6,045,393 3,592
----------- ----------
Property and equipment, gross 42,000,711 1,756,864
Less accumulated depreciation (2,641,383) (70,240)
----------- ----------
Property and equipment, net $39,359,328 $1,686,624
=========== ==========
</TABLE>
Depreciation expense was $2,761,008 and $70,240, respectively, for the
year ended December 31, 1995 and the period June 24, 1994 (inception) to
December 31, 1994.
Included in property and equipment at December 31, 1995 and 1994 are
assets under capital leases of $9,483,145 and $1,250,875, respectively, with
accumulated depreciation of $842,879 and $46,459, respectively.
F-23
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
6. GOODWILL
Amounts reflected in Goodwill, prior to any amortization, by amortization
period are as follows:
<TABLE>
<CAPTION>
Amortization
Period Goodwill
- ------------------ ------------
<S> <C>
20 years $17,346,388
40 years 15,425,993
</TABLE>
Accumulated amortization of goodwill was $840,928 and $37,147 at December
31, 1995 and 1994, respectively.
7. MANAGEMENT SERVICE AGREEMENTS
Amounts reflected in Management Service Agreements, prior to any
amortization, by amortization period (which equals the term of such
management service agreements) are as follows:
<TABLE>
<CAPTION>
Management
Service
Amortization Period Agreements
- ------------------- -----------
<S> <C>
10 years $ 3,018,956
15 years 312,740
20 years 13,299,682
</TABLE>
Accumulated amortization of management service agreements was $254,741 at
December 31, 1995.
8. INVESTMENT IN AFFILIATES
On December 31, 1994, the Company purchased a 36.8% interest in Mobile
Lithotripter of Indiana Partners, for $2,663,000. During May, 1995, Mr.
Gosman purchased a 50% interest in DASCO, a medical facility development
services company, for $9,610,000 (See Note 3 -- Medical Facility Development
Acquisitions). During August 1995, the Company purchased a 46% interest in I
Systems, Inc., for $180,000. I Systems, Inc. is engaged in the business of
claims processing and related services. These investments are being accounted
for using the equity method at December 31, 1995. Upon the completion of the
offering, the remaining 50% interest in DASCO was purchased and DASCO will be
consolidated prospectively.
9. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1994
--------- --------
<S> <C> <C>
Accrued closure costs $ 570,000 $ --
Accrued rent 799,551 --
Accrued property taxes 119,134 --
Accrued professional fees 445,250 --
Accrued offering costs 885,770 --
Accrued interest 738,317 95,548
Accrued bonus payments 4,718,564 707,820
Other 1,090,946 99,532
---------- --------
Total accrued
liabilities $9,367,532 $902,900
========== ========
</TABLE>
The accrued closure costs are for the closure of five radiation therapy
centers acquired when the Company purchased OTI (see Note 3). Closure costs
in the amount of $3,134,028 were accrued at December 31, 1995, $2,564,028 of
this amount is classified as a long term liability.
F-24
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
10. LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES
Long-term debt, notes payable and capital leases consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
----------- ----------
<S> <C> <C>
Note payable due to four individuals payable in eight equal semi-
annual installments of $28,125, including interest at 8%
through November 1998. $ 140,625 $ 225,000
Related party note payable due to three individuals payable on
demand including interest at 10%. One of the notes for $30,000
is collateralized by the cash and accounts receivable of
Pinnacle 130,000 --
Note payable to a bank interest payable monthly at the prime rate
plus 2% (10.50% at December 31, 1995) with a maturity date of
April 1996. 201,422 --
Line of credit note payable to a bank, due and payable on demand,
interest at the prime rate (8.50% at December 31, 1995). 400,000 --
Note payable to a bank, collateralized by the assets of a multi-
specialty group practice, payable in monthly installments of
$14,027, including interest at 7.50% and a final payment in
February 1999. 472,181 --
Note payable to a bank, collateralized by the assets of a multi-
specialty group practice, payable in monthly installments of
$20,608, at 8.75% and a final payment in August 2000. 918,779 --
Note payable in two equal installments in April 1996 and 1997 (or
earlier upon a reorganization which includes an initial public
offering), including interest at 8%. 3,567,408 --
Related party notes payable to the shareholders of DASCO, payable
in May 1996, including interest at 6.37%. 4,610,588 --
Note payable to the former shareholders of a medical oncology
practice in South Florida, payable in ten equal semi-annual
installments of $682,867, which includes interest at 9%. The
note payable is collateralized by an irrevocable letter of
credit, the collateral for which has been provided by Mr.
Gosman. 5,403,337 --
Note payable to a financing institution with a maturity date of
March 2000, a final payment of $2,187,500, and an interest
rate at the prime rate plus 3% (11.50% at December 31, 1995). 15,743,466 --
Note payable to NationsBank, with a maturity date of June 1996
and an interest rate at the prime rate plus .375% (8.875% at
December 31, 1995). This note payable was personally
guaranteed by Mr. Gosman. 19,500,000 --
Note payable to Mr. Gosman with a maturity date of January 1998
and an interest rate at the prime rate (8.50% at December 31,
1995). 36,690,180 --
Capital lease obligations with maturity dates through September
2015 and interest rates ranging from 8.75% to 12%. 9,163,215 1,143,784
---------- ---------
96,941,201 1,368,784
F-25
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
10. LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
December 31,
-------------------------
Less current portion of capital leases (756,767) (401,000)
Less current portion of debt (25,905,743) (56,250)
Less current portion of related party debt (4,740,588) --
------------ ---------
Long term debt and capital leases $ 65,538,103 $ 911,534
============ =========
</TABLE>
The following is a schedule of future minimum principal payments of the
Company's long-term debt and the present value of the minimum lease
commitments:
<TABLE>
<CAPTION>
Capital
Debt Leases
----------- -------------
<S> <C> <C>
Through December 31, 1996 $ 30,646,331 $ 1,719,007
Through December 31, 1997 6,186,372 1,274,938
Through December 31, 1998 4,774,757 1,275,690
Through December 31, 1999 5,050,847 1,045,125
Through December 31, 2000 4,429,508 1,004,484
Thereafter -- 14,027,514
------------ ------------
Total 51,087,815 20,346,758
Less amounts representing interest and executory
costs -- (11,183,551)
------------ ------------
Present value of minimum lease payments -- 9,163,207
Less current portion (30,646,331) (756,767)
------------ ------------
Long term portion $ 20,441,484 $ 8,406,439
============ ============
</TABLE>
During the year ended December 31, 1995, the Company purchased, for
$915,000, two mobile lithotripters that had previously been leased by the
Company.
11. LEASE COMMITMENTS
The Company leases various office space and certain equipment pursuant to
operating lease agreements.
Future minimum lease commitments consisted of the following at December
31:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 6,780,500
1997 6,428,506
1998 5,434,231
1999 4,931,465
2000 3,404,819
Thereafter 16,398,213
-----------
$43,377,734
===========
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings in the ordinary course of its
business and includes the litigation related to OTI as mentioned below. While
the Company cannot estimate the ultimate settlements, if any, it does not
believe that any such legal proceedings, including those related to OTI, will
have a material adverse effect on the Company, its liquidity, financial
position or results of operations, although there can be no assurance to this
effect.
F-26
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
12. COMMITMENTS AND CONTINGENCIES (Continued)
The Company has entered into employment agreements with certain of its
employees, which include, among other terms, noncompetition provisions and
salary and benefits continuation.
The Company has also entered into contingent payment arrangements pursuant
to several acquisitions (see Note 3).
The Company has committed to expend up to $1,500,000 per year for each of
three years to assist in the expansion activities of a 22-physician
multi-specialty group practice it entered into a management agreement with in
September 1995. In addition, the Company has agreed to acquire certain
copyright and trademark interests of the practice (see Note 3).
A subsidiary of the Company, OTI, (formerly Radiation Care, Inc., "RCI")
is subject to the litigation described below which related to events prior to
the Company's operation of RCI, and the Company has agreed to indemnify and
defend certain defendants in the litigation who were former directors and
officers of RCI subject to certain conditions.
In December, 1994, prior to its merger with the Company in March 1995, RCI
entered into a settlement agreement with the federal government arising out
of claims under the fraud-and-abuse provisions of the Medicare law. Under the
settlement agreement, RCI, without admitting that it violated the law,
consented to a civil judgment providing for its payment of $2 million and the
entry of an injunction against violations of such provisions.
On February 16, 1995, six former RCI shareholders filed a consolidated
amended Class Action Complaint in Delaware Chancery Court (In Re Radiation
Care, Inc. Shareholders Litigation, Consolidated C.A. No. 13805) against RCI,
Thomas Haire, Gerald King, Charles McKay, Abraham Gosman, Oncology Therapies
of America, Inc. and A.M.A. Financial Corp., alleging that the RCI
shareholders should have been paid more for their RCI stock when RCI was
acquired by the Company. Plaintiffs allege breaches of fiduciary duty by the
former RCI directors, as well as aiding and abetting of said fiduciary duty
breaches by Mr. Gosman, Oncology Therapies of America, Inc. and A.M.A.
Financial Corp. Plaintiffs seek compensatory or rescissionary damages of an
undisclosed amount of behalf of all RCI shareholders, together with an award
of the costs and attorneys' fees associated with the action. No class has
been certified in this litigation and, in early 1995, plaintiffs' counsel
granted an indefinite extension within which for the defendants to answer or
otherwise respond to the Complaint and to plaintiffs' document requests.
Plaintiffs have taken no discovery and there has been virtually no activity
in the litigation since plaintiffs' filing of the consolidated amended class
action complaint. On April 6, 1996, plaintiffs' counsel contacted the Company
for additional document requests and a response to their requests. The
Company has not yet answered the complaint and no other proceedings have
taken place. The Company intends to vigorously defend against the plaintiffs'
requests.
On August 4, 1995, 26 former shareholders of RCI filed a Complaint for
Money Damages against Richard D'Amico, Ted Crowley, Thomas Haire, Gerald
King, Charles McKay and Randy Walker (all former RCI officers and directors)
in the Superior Court of Fulton County, in the State of Georgia (Southeastern
Capital Resources, L.L.C. et al v. Richard D'Amico et al, Civil Action No.
E41225). The Company (OTI) has agreed to assume the defense and indemnify the
defendants subject to certain conditions set forth in an agreement with the
defendants. The Complaint contains five counts--breach of fiduciary duty
counts against former RCI directors Haire, King and McKay, a "conspiracy"
Count against the RCI officer defendants D'Amico, Crowley, and Walker, and a
negligence count against all defendants. Paintiffs seek additional
consideration for their shares of RCI stock in the form of compensatory and
monetary damages. The Company has agreed to assume, subject to certain
conditions, the defense of the individual defendants in this litigation. An
Answer or other response is currently due September 22, 1995. The defendants
will be filing an answer denying any liability in connection with this
matter. On October 23, 1995, the defendants filed a motion to stay the action
pending resolution of the Delaware class action which was heard
F-27
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
12. COMMITMENTS AND CONTINGENCIES (Continued)
by the court on January 29, 1996. On April 9, 1996, Company counsel learned
that the court has denied the motion and that a written decision reflecting
the court's decision would be forthcoming. Plaintiffs have filed a motion
with a proposed amended complaint adding four plaintiffs to the action, upon
which the court has not yet acted. The Company is not a party to this
litigation and its exposure in this litigation is limited to OTI's obligation
under its by-laws to indemnify the former officers and directors of RCI to
the fullest extent permitted by Delaware law. The Company intends to
vigorously defend the plaintiffs' demands.
13. RELATED PARTY
For the year ended December 31, 1995 and the period June 24, 1994
(inception) to December 31, 1994, Continuum Care of Massachusetts, Inc.,
whose principal shareholder is Mr. Gosman, provided management services to
the Company. Fees for these services in the amount of $3,729,680 and
$1,629,753, respectively, have been included in the financial statements and
consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1994
--------- -----------
<S> <C> <C>
Salaries, wages and
benefits $2,267,891 $ 934,200
Professional fees 273,941 253,955
Rent 459,732 192,242
Other 728,116 249,316
---------- ----------
$3,729,680 $1,629,753
========== ==========
</TABLE>
Included in other expenses are expenses incurred in connection with the
use of an airplane which is owned by Mr. Gosman. Such fees are based on the
discretion of Continuum Care of Massachusetts, Inc.. and may not be
indicative of what they would have been if the Company had performed these
services internally or had contracted for such services with unaffiliated
entities. Included in rent is rent expense of approximately $415,000 and
$156,000 for the year ended December 31, 1995 and the period June 24, 1994
(inception) to December 31, 1994, respectively, for the Company's principal
office space in West Palm Beach, Florida. The lessee of the office space is
Continuum Care of Massachusetts, Inc.. The current lease term expires
December 31, 1999. The Company assumed the lease from Continuum Care of
Massachusetts, Inc. upon the consummation of the offering.
In connection with the purchase of Nutrichem during November 1994, the
Company is required to make contingent note payments in the amount of
$4,444,444 which has been accrued at December 31, 1995. Payments on the
contingent note are based on attaining certain earnings thresholds. The
$4,444,444 which has been accrued represents the maximum remaining amount
that can be earned because the earnings threshold upon which the payment is
based was reached during 1995. The contingent note is personally guaranteed
by Mr. Gosman. The contingent note was paid in full during January 1996 with
the proceeds from the offering.
During March 1995, the Company incurred a $17,500,000 note payable to a
financing institution in connection with the purchase of OTI, Mr. Gosman
personally guaranteed a portion of the $17,500,000. Mr. Gosman's liability
under the guarantee was limited to no more than $6,125,000. The note was paid
in full during January 1996 with the proceeds from the offering.
During May 1995, Mr. Gosman incurred $4,610,588 of debt payable, which has
been included in these financial statements, to the shareholders of DASCO in
connection with the purchase of 50% of the outstanding stock of DASCO. The
notes bear interest at 6.37% per annum with a maturity of May 1996.
DASCO provides development and other services in connection with the
establishment of health parks, medical malls and medical office buildings.
DASCO provides these services to or for the benefit of the owners of the new
F-28
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
13. RELATED PARTY (Continued)
facilities, which owners are either corporations or limited partnerships. Mr.
Sands and Mr. Rendina have acquired equity interest, as of December 31, 1995,
in the owners of 19 of the 20 facilities developed by DASCO and interests
ranging from 6% to 100% collectively for Mr. Sands and Mr. Rendina. In
addition, as of December 31, 1995, Mr. Gosman individually and as trustee for
his two adult sons and certain executive officers have acquired limited
partnership interests ranging from 23% to 47% in the owners of three
facilities being developed by the Company through DASCO.
Meditrust, a publicly traded real estate investment trust with assets in
excess of $1.7 billion of which Mr. Gosman is the Chairman of the Board and
Chief Executive Officer, has provided construction financing to customers of
DASCO in the aggregate amount of $59,897,000 for nine facilities developed by
DASCO, and at December 31, 1995 was providing financing to customers of DASCO
in the aggregate amount of $6,750,000 for one facility under development by
the Company through DASCO.
At December 31, 1995, the Company had borrowed $36,690,180 from Mr.
Gosman. Interest on such outstanding indebtedness at the prime rate of
interest during the year ended December 31, 1995 was $1,708,174. During
January 1996, the Company repaid Mr. Gosman $28,676,743 of such advances with
the proceeds of the offering.
During July 1995, the Company purchased the assets of and entered into a
15-year management agreement with a medical oncology practice with three
medical oncologists. An affiliate of the Company, Continuum Care of
Massachusetts, Inc., guarantees the performance of the Company's obligations
under the management agreement.
During August 1995, the Company purchased a 46% interest in a company
engaged in the business of claims processing and related services. This
entity provides certain billing and collection services to one of the medical
oncology practices owned by the Company.
During September 1995, the Company provided a letter of credit in the
amount of $5,403,337 to a seller in connection with entering into a
management agreement and purchasing the assets of a medical oncology
practice. Prior to the completion of the offering, the collateral for the
letter of credit was provided by Mr. Gosman.
During September 1995, the Company refinanced $19,500,000 of an amount
owed to Mr. Gosman with NationsBank. The $19,500,000 amount refinanced with
NationsBank and outstanding at December 31, 1995 is personally guaranteed by
Mr. Gosman. The $19,500,000 was paid in full during January 1996 with the
proceeds of the offering.
During November 1995, the Company assumed $180,000 of notes payable to
four former shareholders of Pinnacle when the Company merged with Pinnacle.
One of these notes for $50,000 was repaid during December 1995. The remaining
notes bear interest at 10% and are payable upon demand.
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The methods and assumptions used to estimate the fair value of each class
of financial instruments, for which it is practicable to estimate that value,
and the estimated fair values of the financial instruments are as follows:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short effective
maturity of these instruments.
Long-term Debt
The fair value of the Company's long-term debt and capital leases is
estimated based on the current rates offered to the Company for debt of the
same remaining maturities. The carrying amount and fair value of long-term
debt and capital leases, including current maturities and related party debt,
at December 31, 1995 and December 31, 1994 is $96,941,201 and $1,368,784,
respectively.
F-29
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
15. EMPLOYEE BENEFIT PLAN
On January 1, 1995, the Company began sponsoring a 401(k) plan, covering
substantially all of its employees. Contributions under the 401(k) plan equal
50% of the participants' contributions up to a maximum of $400 per
participant per year.
16. INCOME TAXES
At December 31, 1995, the Company had available net operating loss
carryforwards of approximately $30,949,000 for federal income tax purposes,
which expire beginning in 2007 related to OTI. As a result of the purchase,
OTI underwent an ownership change as defined in Section 382 of the Internal
Revenue Code of 1986, as amended. This ownership change substantially limits
the ability of the Company to utilize $29,284,000 of its net operating loss
carryforwards in future years. No benefit has been provided for these loss
carryforwards based on uncertainty as to ultimate realizations. There were no
deferred taxes at December 31, 1995 since the various entities that comprised
the Company were either S Corporations or partnerships.
Components of deferred income taxes at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
December 31,
1995
------------
<S> <C>
Deferred income tax assets:
Net operating loss carryforwards $12,070,000
Start-up costs 37,800
Allowance for doubtful accounts 284,000
Other 689,000
-----------
13,080,800
-----------
Deferred income tax liabilities:
Property and depreciation (3,807,000)
-----------
Deferred income taxes 9,273,800
Valuation allowance (9,273,800)
-----------
Net deferred income taxes $ --
===========
</TABLE>
FAS 109 specifies that deferred tax assets are to be reduced by a
valuation allowance if it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Substantially all of this
allowance relates to deferred tax assets and liabilities existing at the date
of each acquisition.
17. SUPPLEMENTAL CASH FLOW INFORMATION
During the year ended December 31, 1995 and the period from June 24, 1994
to December 31, 1994 the Company acquired the assets and assumed certain
liabilities of the entities described in Note 3. The transactions had the
following non-cash impact on the balance sheets:
F-30
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
17. SUPPLEMENTAL CASH FLOW INFORMATION (Continued)
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1994
----------- ------------
<S> <C> <C>
Current assets $ 12,463,007 $ 3,784,624
Property, plant and equipment 40,817,404 1,603,347
Intangibles 43,155,934 6,247,825
Other noncurrent assets 2,197,691 --
Current liabilities (8,174,988) (1,611,446)
Debt (43,179,672) (1,322,614)
Noncurrent liabilities (2,913,635) (517,834)
</TABLE>
18. STOCK OPTION PLAN
The Company has adopted a stock option plan for issuance of common stock
to key employees and directors of the Company. Under this plan, the exercise
provision and price of the options will be established on an individual basis
generally with the exercise price of the options being not less than the
market price of the underlying stock at the date of grant. The Company issued
options simultaneously with the completion of the offering to purchase
approximately 1,071,333 shares at the fair market value at the date of grant.
The options generally will become exercisable beginning in the first year
after grant in 20% - 33% increments per year and expire 10 years after the
date of grant. In addition, the Company will grant options to purchase
137,500 shares of common stock of the Company (68,750 shares at $3.00 per
share and 68,750 shares at $5.00 per share) in exchange for outstanding
options to purchase stock of the IPO entities which were granted during 1995
at no less than the fair market value at the time of grant. Options to
purchase 26,250 shares at $3.00 per share and 26,250 shares at $5.00 per
share have vested at December 31, 1995. The remaining options will become
exercisable in 25% - 33% increments per year and expire 10 years after the
date of grant.
19. SUBSEQUENT EVENTS
The Company filed a Registration Statement on Form S-1 with the Securities
and Exchange Commission in connection with the initial public offering which
became effective January 23, 1996. Pursuant to such offering, the Company
issued 8,222,500 shares of Common Stock. Net proceeds to the Company from the
stock issue, after deduction of underwriters' commissions and offering
expenses, were $112,485,681.
During January 1996, the Company used approximately $71,500,000, from the
proceeds of the offering, to repay the following indebtedness and obligations
of the Company that arose from certain acquisitions: (i) a promissory note to
Aegis in the amount of $3,796,503 (including interest); (ii) a contingent
note to the shareholders of Nutrichem, net of a tax loan receivable due from
the shareholders, in the amount of $3,854,595 (including interest); (iii) a
note payable to a financing institution in connection with the purchase of
OTI in the amount of $15,585,023 (including interest); (iv) a note payable to
NationsBank in the amount of $19,586,531 (including interest); and (v) a
partial payment of $28,676,743 on the note payable to Mr. Gosman.
After the completion of the offering, the Company changed its fiscal year
end from December 31 to January 31.
20. PRO FORMA RESULTS (UNAUDITED)
The unaudited pro forma combined balance sheet at December 31, 1995 has
been prepared assuming the issuance of 8,222,500 shares of Common Stock and
the application of the net proceeds therefrom, including the repayment of
indebtedness (see Note 19) and the reclassification of initial public
offering costs included in other
F-31
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
20. PRO FORMA RESULTS (UNAUDITED) (Continued)
assets to additional paid in capital as if the offering had occurred on
December 31, 1995. The unaudited pro forma combined balance sheet at December
31, 1995 also assumes the acquisition, simultaneous with the offering, of the
remaining 50% ownership interest in DASCO and the remaining 20% ownership
interest in Nutrichem.
The accompanying financial statements include the results of operations
derived from the entities purchased by the Company. The following unaudited
pro forma information presents the results of operations of the Company for
the years ended December 31, 1995 and 1994 as if the acquisition of the
entities purchased to date had been consummated on January 1, 1995 and
January 1, 1994. Such unaudited pro forma information is based on the
historical financial information of the entities that have been purchased and
does not include operational or other changes which might have been effected
pursuant to the Company's management.
The unaudited pro forma information presented below is for illustrative
informational purposes only and is not necessarily indicative of results
which would have been achieved or results which may be achieved in the future
(in thousands except per share amounts):
<TABLE>
<CAPTION>
Pro Forma
-------------------------
December
31, December 31,
1995 1994
---------- ------------
(unaudited) (unaudited)
<S> <C> <C>
Revenue $125,342 $107,438
Loss (11,871) (22,555)
Loss per share
(1) $ (0.89) $ (1.62)
======== ========
</TABLE>
- -------------
(1) Pro forma loss per share has been calculated based on 13,307,450 shares
outstanding.
F-32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders
DASCO Development Corporation and Affiliate
West Palm Beach, Florida
We have audited the accompanying combined balance sheet of DASCO
Development Corporation and Affiliate as of September 30, 1995, and the
related combined statements of income and retained earnings and cash flows
for the nine month period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DASCO Development
Corporation and Affiliate as of September 30, 1995, and the results of their
operations and their cash flows for the nine month period then ended in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Miami, Florida
November 6, 1995
F-33
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
COMBINED BALANCE SHEET
September 30, 1995
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 59,771
Accounts receivable from related parties 180,292
Advances on development projects 434,353
Other current assets 3,086
---------
Total current assets 677,502
Property and equipment, net 39,708
---------
Total assets $ 717,210
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 57,449
Accrued liabilities 175,429
Accrued distributions 319,056
Unearned revenues 119,806
---------
Total current liabilities 671,740
---------
Commitments
Stockholders' equity:
Common stock:
Dasco: $.01 par value, 100,000 shares authorized; 2,000 issued and outstanding 20
Dasco West: no par value, 400,000 shares authorized; 200,000 issued and
outstanding 200
Additional paid in capital 280
Retained earnings 44,970
---------
Total stockholders' equity 45,470
---------
Total liabilities and stockholders' equity $ 717,210
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
For the nine month period ended September 30, 1995
<TABLE>
<CAPTION>
<S> <C>
Revenues $2,566,142
----------
Expenses:
Salaries, benefits and payroll taxes 1,737,021
Occupancy 118,992
Other general and administrative 320,332
----------
Total expenses 2,176,345
----------
Income from operations 389,797
----------
Other income (expense):
Interest income 9,658
Interest expense (12,442)
----------
Other income (expense) (2,784)
----------
Net income 387,013
Distributions (319,056)
Retained earnings, beginning of period (22,987)
----------
Retained earnings, end of period $ 44,970
==========
Net income per common share $ 1.92
==========
Weighted average shares outstanding 202,000
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
COMBINED STATEMENT OF CASH FLOWS
for the nine month period ended September 30, 1995
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net income $ 387,013
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 9,715
Changes in operating assets and liabilities:
Accounts receivable from related parties (79,118)
Advances on development projects (434,353)
Other current assets (3,086)
Accounts payable 48,198
Accrued liabilities 128,347
Due from shareholder 12,700
Unearned revenues 19,806
---------
Net cash provided by operating activities 89,222
---------
Cash flows from investing activities:
Purchases of property and equipment (22,839)
---------
Net cash used in investing activities (22,839)
---------
Cash flows from financing activities:
Advances under line of credit 297,000
Repayments under line of credit (297,000)
Proceeds from loans from stockholders 215,638
Repayments on loans from stockholders (380,221)
Distributions to stockholders (124,789)
---------
Net cash used in financing activities (289,372)
---------
Net decrease in cash and cash equivalents (222,989)
Cash and cash equivalents, beginning of period 282,760
---------
Cash and cash equivalents, end of period $ 59,771
=========
Supplemental disclosures:
Interest paid $ 12,442
=========
Noncash financing activities:
During the nine month period ended September 30, 1995, distributions of
$319,056 were declared and accrued.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
Notes to Combined Financial Statements
1. Summary of Significant Accounting Policies:
Nature of Operations
DASCO Development Corporation and Affiliate (the "Company") is engaged in
the development, construction, management, marketing and leasing of
outpatient healthcare and medical office facilities throughout the United
States. The Company's headquarters are located in West Palm Beach, Florida
and it has regional offices in La Jolla, California, Plymouth Meeting,
Pennsylvania, and Las Vegas, Nevada.
Principles of Combined Financial Statements
The accompanying combined financial statements include the accounts of
DASCO Development Corporation and DASCO Development West, Inc. as they are
under common control.
Significant intercompany transactions and balances have been eliminated in
the combined financial statements.
Revenue Recognition
Generally, revenues are recognized at the time services are performed
except for development fees which are recognized in accordance with the
related development agreement which generally calls for achievement of
milestones such as receipt of building permit and percentage completion of
building shell.
Income Taxes
The Company has elected to be taxed under the provisions of the Internal
Revenue Code Section 1361. Under those provisions, the Company does not pay
federal or state corporate income taxes on its taxable income. Instead, the
stockholders are liable for individual income taxes on their proportionate
share of the Company's taxable income. Accordingly, no provision for federal
income taxes is reflected in the accompanying combined financial statements.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with maturities of three months or
less when purchased to be cash equivalents.
Advances on Development Projects
Advances on development projects relate to direct costs incurred in
connection with development transactions in progress. Such costs are
reimbursed from the owner of the project at the time of closing of the
project loan. If the project is not ultimately consummated, the capitalized
costs are charged to income at the time it is determined that the project is
not feasible.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided for
using accelerated methods over estimated useful lives of the assets, which
are generally five years. When assets are retired or otherwise disposed, the
cost and related accumulated depreciation are removed from the accounts, and
any resulting gain or loss is reflected in income for the period. The cost of
maintenance and repairs is charged to operations as incurred, significant
renewals and betterments are capitalized.
Unearned Revenue
Unearned revenue, which relates to marketing fees received in advance of
execution of the related lease agreement, is recognized at the time the
related lease agreement is executed with the applicable tenant.
F-37
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
Notes to Combined Financial Statements (Continued)
2. Property and Equipment:
Property and equipment at September 30, 1995, is comprised of:
<TABLE>
<CAPTION>
<S> <C>
Office equipment $ 62,463
Less: accumulated depreciation (22,755)
--------
Property and equipment, net $ 39,708
========
</TABLE>
Depreciation expense for the nine month period ended September 30, 1995,
was $9,715.
3. Line of Credit:
The Company has entered into a $1,500,000 line of credit with a financial
institution which is used to fund working capital needs. The line matures on
August 31, 1996, and bears interest at the 30 day commercial paper rate plus
2.9% (8.7% at September 30, 1995). The line of credit is collateralized by
assets of the Company and is guaranteed by the Company's stockholders. No
amounts were outstanding under the line of credit at September 30, 1995.
4. Commitments:
Leases
The Company leases commercial property and equipment under noncancelable
operating lease arrangements expiring between 1996 and 2005.
Future minimum rental payments under the operating leases at September 30,
1995, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 135,000
1997 122,000
1998 127,000
1999 133,000
2000 138,000
Thereafter 680,000
----------
Total $1,335,000
==========
</TABLE>
Rental expense amounted to approximately $112,000 during the nine months
ended September 30, 1995.
Employment Agreements
The Company has entered into various employment agreements with key
employees. These agreements generally are for a one year period and are
automatically renewed. Amounts to be paid under these agreements during the
next twelve months are approximately $443,000.
5. Related Party Transactions:
The properties developed by the Company are owned by partnerships that are
owned in part by the Company's stockholders individually. The Company's
stockholders individually also own the stock of the corporations which serve
as the managing general partners of these partnerships.
Revenues during the nine month period ended September 30, 1995, were
generated principally from related parties.
The Company is a party to a noncancelable lease for its premises which is
owned in part by the Company's stockholders. Under the terms of this lease,
the Company is obligated to pay $113,522 during the year ended
F-38
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
5. Related Party Transactions: (Continued)
September 30, 1996. The lease includes scheduled base rent increases over the
term of the lease. The total amount of the base rent payments is being
charged to expense on the straight-line method over the term of the lease. In
addition to the base rent payment, the Company pays a monthly allocation of
the buildings' operating expenses. Included in accrued liabilities at
September 30, 1995, is approximately $18,900 related to the excess of rent
expense over cash payments since inception of the lease. Future minimum lease
payments due under this lease are reflected in Note 4.
Rent expense under this lease during the nine month period ended September
30, 1995, was approximately $92,000.
6. Disclosures About Fair Value of Financial Instruments:
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 107, "Disclosures About Fair Value of
Financial Instruments", which requires disclosure of fair value information
about financial instruments. The carrying amounts reported in the balance
sheet for cash and cash equivalents and short term borrowing approximate fair
value due to the short term nature of these instruments.
7. Change in Shareholder:
On May 31, 1995, 50% of the outstanding common stock of the Company was
purchased by a private investor. This individual is also the Chairman of the
Board of Directors of the lending institution which has provided financing
for certain of the projects developed by the Company. There was no change in
the outstanding stock or capitalization of the Company as a result of this
transaction.
The private investor and the other two owners of the Company have agreed
to contribute the stock of the Company to Continuum Care Corporation
(Continuum), in support of their initial public offering, in exchange for
common stock of Continuum.
F-39
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders
Dasco Development Corporation and Affiliate
West Palm Beach, Florida
We have audited the accompanying combined balance sheets of Dasco
Development Corporation and Affiliate as of December 31, 1994, 1993 and 1992,
and the related combined statements of income and retained earnings and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Dasco Development
Corporation and Affiliate as of December 31, 1994, 1993 and 1992, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
BOBER, MARKEY & COMPANY
July 31, 1995
F-40
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
COMBINED BALANCE SHEETS
December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
------- --------- -----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $282,760 $ 69,929 $ 26,603
Related party accounts receivable 101,174 54,076 76,466
Advances on development projects -- 642,433 284,929
Due from shareholders 12,700 500 9,800
Related party notes receivable -- 911,460 910,911
-------- ---------- ----------
Total current assets 396,634 1,678,398 1,308,709
Net property, plant and equipment 26,584 6,360 8,999
-------- ---------- ----------
Total assets $423,218 $1,684,758 $1,317,708
======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit $ -- $ 299,000 $ --
Accounts payable 9,251 102,350 7,716
Accrued and withheld payroll and taxes 39,182 19,669 11,350
Accrued state income taxes 7,900 -- --
Accrued distributions 124,789 -- --
Deposits -- -- 6,435
Related party demand notes payable 164,583 1,704,341 1,544,050
-------- ---------- ----------
Total current liabilities 345,705 2,125,360 1,569,551
Unearned revenues 100,000 2,629 --
Stockholders' equity
Common stock 500 500 300
Retained earnings (22,987) (443,731) (252,143)
-------- ---------- ----------
Total stockholders' equity (22,487) (443,231) (251,843)
-------- ---------- ----------
Total Liabilities and stockholders' equity $423,218 $1,684,758 $1,317,708
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
For the years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
---------- --------- ----------
<S> <C> <C> <C>
Revenues $ 4,371,000 $ 931,535 $ 918,589
Expenses Salaries, benefits and payroll taxes 1,611,861 904,381 535,108
Occupancy 101,125 77,158 69,740
Other general and administrative 374,394 73,706 155,619
----------- --------- ---------
Total expenses 2,087,380 1,055,245 760,467
----------- --------- ---------
Income (loss) from operations 2,283,620 (123,710) 158,122
Other (expenses) income
Interest income 95,880 64,076 52,011
Interest expense (120,736) (131,954) (101,758)
----------- --------- ---------
Total other (expenses) income (24,856) (67,878) (49,747)
----------- --------- ---------
Net income (loss) 2,258,764 (191,588) 108,375
Distributions (1,838,020) -- --
Beginning retained earnings (443,731) (252,143) (360,518)
----------- --------- ---------
Ending retained earnings $ (22,987) $ (443,731) $(252,143)
=========== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
---------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 2,258,764 $(191,588) $ 108,375
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation 5,914 2,639 3,235
(Increase) decrease in due from shareholders (12,200) 9,300 (8,540)
(Increase) decrease in accounts receivable (47,098) 22,390 (76,466)
(Increase) decrease in advances on development projects 642,433 (357,504) (217,420)
Increase (decrease) in accounts payable (93,099) 94,634 754
Increase in accrued and withheld payroll and taxes 19,513 8,319 3,015
Increase in accrued state income taxes 7,900 -- --
Increase in accrued distributions 124,789 -- --
Increase (decrease) in deposits -- (6,435) 6,435
Increase in unearned revenues 97,371 2,629 --
---------- --------- ---------
Net cash provided (used) by operating activities 3,004,287 (415,616) (180,612)
Cash flows from investing activities
Proceeds from repayment of related party notes receivable 911,460 -- --
Investment in related party notes receivable -- (549) (422,286)
Equipment additions (26,138) -- (2,337)
---------- --------- ---------
Net cash provided (used) by investing activities 885,322 (549) (424,623)
Cash flows from financing activities
Net repayments on line of credit (299,000) 299,000 (218,640)
Net borrowings on loans payable (1,539,758) 160,291 760,542
Issuance of capital stock -- 200 --
Distributions paid (1,838,020) -- --
---------- --------- ---------
Net cash provided (used) by financing activities (3,676,778) 459,491 541,902
---------- --------- ---------
Net increase (decrease) in cash and cash equivalents 212,831 43,326 (63,333)
Cash and cash equivalents--beginning of year 69,929 26,603 89,936
---------- --------- ---------
Cash and cash equivalents--end of year $ 282,760 $ 69,929 $ 26,603
=========== ========= =========
Supplemental disclosures
Interest paid $ 120,741 $ 131,954 $ 105,431
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
For the Years Ended December 31, 1994, 1993 and 1992
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
DASCO Development Corporation and Affiliate (the "Company") is engaged in
the development, construction, management, marketing and leasing of
outpatient healthcare and medical office facilities throughout the United
States. The Company's headquarters are located in West Palm Beach, Florida
and has regional offices in La Jolla, California, opened in February 24,
1993, Plymouth Meeting, Pennsylvania, opened June 1, 1995 and Las Vegas,
Nevada, opened July 1, 1995.
Principles of Combination
The accompanying combined financial statements include the accounts of
DASCO Development Corporation and DASCO Development West, Inc., as they are
under common control. DASCO Development West, Inc. commenced operations on
March 1, 1993.
Significant intercompany transactions and balances have been eliminated in
the combined financial statements.
Revenue Recognition
Generally, revenues are recognized at the time services are performed
except for development fees which are recognized in accordance with the
related development agreement which generally calls for achievement of
milestones such as receipt of building permit and percentage completion of
building shell.
Income Taxes
The Company has elected S Corporation status under the Internal Revenue
Code. All income and expense items of the Company are to be recognized in the
tax returns of the stockholders. Accordingly, no provision for federal income
taxes is reflected in the accompanying combined financial statements.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents. At December 31, 1994, the entire
balance was comprised of cash equivalents including treasury notes,
government obligations, and high grade corporate securities.
Advances on Development Projects
Advances on development projects relate to direct costs incurred in
connection with development transactions in progress. Such costs are
reimbursed from the owner of the project at the time of closing of the
project loan. If the project is not ultimately consummated, the capitalized
costs are charged to income at the time it is determined that the project is
not feasible.
Property and Equipment
Office equipment and leasehold improvements are being depreciated using
accelerated methods over estimated useful lives, which are generally five
years. When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any resulting
gain or loss is reflected in income for the period. The cost of maintenance
and repairs is charged to operations as incurred; significant renewals and
betterments are capitalized.
Unearned Revenue
Unearned revenue, which relates to marketing fees received in advance of
execution of the related lease agreement, is recognized at the time the
related lease agreement is executed with the applicable tenant.
F-44
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Fair Value of Financial Instruments
In December 1991, the FASB issued SFAS No. 107, Disclosures About Fair
Value of Financial Instruments, which requires certain disclosures about fair
value of certain financial instruments such as notes payable and notes
receivable. The statement applies to the Company's financial statements for
the year ending December 31, 1995. The impact of the statement on the
Company's financial statement disclosures is not determinable.
2. RELATED PARTY NOTES RECEIVABLE
Notes receivable as of December 31, 1994, 1993 and 1992, consist of demand
notes receivable from related parties with interest rates ranging from seven
to eleven percent.
3. PROPERTY AND EQUIPMENT
The major classes are:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1994 1993 1992
------- ------ --------
<S> <C> <C> <C>
Office equipment $ 33,624 $13,486 $13,486
Construction in progress 6,000 -- --
-------- ------- -------
39,624 13,486 13,486
Accumulated depreciation (13,040) (7,126) (4,487)
-------- ------- -------
$ 26,584 $ 6,360 $ 8,999
======== ======= =======
</TABLE>
4. RELATED PARTY NOTES PAYABLE
Notes payable at December 31, 1994, 1993 and 1992 consist of demand
unsecured notes payable to related parties with interest rates ranging from
seven to ten percent.
5. LINE OF CREDIT
The Company has an unsecured $300,000 line of credit available in which
there was no balance as of December 31, 1994, $299,000 balance as of December
31,1993, and no balance as of December 31, 1992. The interest rate on the
line was prime plus one percent. This line of credit expired in 1994.
6. LEASE COMMITMENTS
The Company leases commercial property and equipment under operating
leases.
Minimum future rental payments under noncancelable operating leases having
remaining terms in excess of one year as of December 31, 1994 for each of the
next five years and in the aggregate are:
<TABLE>
<CAPTION>
<S> <C>
1995 $ 110,960
1996 117,052
1997 119,405
1998 124,687
1999 129,148
Subsequent to 1999 725,710
----------
Total minimum future lease payments $1,326,962
==========
</TABLE>
F-45
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
7. RELATED PARTY TRANSACTIONS
The properties developed by the Company are owned by partnerships that are
owned in part by the Company's stockholders individually. The Company's
stockholders individually also own the stock of the corporations which serve
as the managing general partners of these partnerships.
Revenues in 1994, 1993 and 1992 were generated principally from related
parties.
Paramount Real Estate Services, Inc., a property management firm
controlled by the Company's shareholders, provides management services on a
fee basis for properties developed by the Company. In addition, included in
revenues for 1994, 1993 and 1992 is $44,931, $52,691 and $1,275,
respectively, from Paramount Real Estate Services, Inc.
The Company leases office space from entities which are owned in part by
the Company's stockholders. The Company paid rents in the amount of $93,106
for 1994, $71,010 for 1993, and $64,373 for 1992 under these lease
arrangements which expire in 2004. The Company is obligated to pay $107,010
for 1995 with annual increases equal to 5% of the base rent amount for each
year until lease expiration.
8. STOCKHOLDERS' EQUITY
Combined common stock including paid-in capital of $280 of DASCO
Development Corporation consists of the following:
<TABLE>
<CAPTION>
<S> <C>
DASCO Development Corporation
$.01 stated value, authorized 20,000 shares; 2,000 issued and
outstanding at December 31, 1994, 1993, and 1992 $300
DASCO Development West, Inc.
No par value, authorized 400,000 shares; 200,000 issued and outstanding
at December 31, 1994 and 1993 $200
</TABLE>
The Board of Directors declared a distribution of $124,789 during December
1994 for payment in early 1995. This amount is reflected as accrued
distributions at December 31, 1994.
9. SUBSEQUENT EVENT
On May 31, 1995, 50% of the outstanding common stock of the Company was
purchased by a private investor. This individual is also the Chairman of the
Board of Directors of the lending institution which has provided financing
for certain of the projects developed by the Company. There was no change in
the outstanding stock or capitalization of the Company as a result of this
transaction.
The Company opened new regional offices in Plymouth Meeting, Pennsylvania
on June 1, 1995 and Las Vegas, Nevada on July 1, 1995.
F-46
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders of Radiation Care, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Radiation
Care, Inc. and Subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of operations, stockholders' equity and cash flows
for the year ended December 31, 1994, the nine month period ended December
31, 1993 and the year ended March 31, 1993. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Radiation
Care, Inc. and Subsidiaries as of December 31, 1994 and 1993, and the
consolidated results of their operations and cash flows for the year ended
December 31, 1994, the nine month period ended December 31, 1993 and the year
ended March 31, 1993 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
October 5, 1995
F-47
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1994 and 1993
<TABLE>
<CAPTION>
December
31, December 31,
1994 1993
----------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 9,947,849 $ 2,801,139
Investments in marketable securities (Note 3) 207,107 14,902,078
Patient accounts receivable, less allowance for doubtful
accounts of $418,152 and $466,838 at December 31, 1994 and
1993, respectively 3,215,894 3,926,859
Current portion of receivable from affiliate (Note 4) 596,023 508,103
Note receivable 375,000
Accrued interest receivable 50,940 104,232
Other current assets 299,848 420,788
------------ -----------
Total current assets 14,317,661 23,038,199
Investment in affiliate (Note 4) 1,000,000 5,044,747
Receivable from affiliate, exclusive of current portion (Note 4) 762,615 1,358,636
Investments in managed centers (Note 5) 1,010,360
Property and equipment, net (Notes 6 and 7) 30,068,244 39,304,478
Goodwill and other intangible assets, net of accumulated
amortization of $991,523 and $1,019,115 at December 31, 1994
and 1993, respectively (Notes 6 and 14) 7,998,609 12,606,022
Deposits and other assets 1,122,450 1,426,021
------------ -----------
Total assets $ 55,269,579 $83,788,463
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt (Note 8) $ 737,832 $ 2,653,033
Current portion of capital lease obligations (Note 13) 952,989 924,802
Accounts payable 2,446,261 2,597,918
Accrued expenses 1,423,828 790,486
Income taxes payable 58,000 41,371
------------ -----------
Total current liabilities 5,618,910 7,007,610
Long-term debt, exclusive of current portion (Note 8) 833,659 9,450,997
Capital lease obligations, exclusive of current portion (Note
13) 1,252,498 2,215,756
------------ -----------
Total liabilities 7,705,067 18,674,363
------------ -----------
Commitments and contingencies (Notes 12 and 13)
Stockholders' equity (Notes 8, 9, and 11):
Preferred stock, $.01 par value, shares authorized 6,000,000 and
1,000,000 shares at December 31, 1994 and 1993 respectively:
none outstanding
Common stock, $.01 par value, 50,000,000 shares authorized;
18,052,167 shares issued and outstanding 180,522 180,522
Additional paid-in capital 73,215,363 73,441,200
Accumulated deficit (22,087,035) (4,312,107)
Unrealized losses on investments in marketable securities (20,294)
--------- ----------
51,288,556 69,309,615
Less treasury stock at cost, 1,644,305 and 1,852,478 shares at
December 31, 1994 and 1993, respectively (3,724,044) (4,195,515)
------------ -----------
Stockholders' equity--net 47,564,512 65,114,100
------------ -----------
$ 55,269,579 $83,788,463
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-48
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December Year Ended
December 31, 31, March 31,
1994 1993 1993
------------ ----------- ------------
<S> <C> <C> <C>
Patient revenues, net $ 25,785,560 $22,330,113 $27,797,837
Cost of revenues 18,856,207 14,909,266 17,208,305
------------ ----------- -----------
Gross profit 6,929,353 7,420,847 10,589,532
Operating expenses
Selling, general and administrative
Related party--rent (Note 12) 266,050 232,391 308,141
Other 10,733,999 8,250,443 10,120,322
Provision for doubtful accounts 936,019 876,923 1,362,835
Amortization of intangibles 530,490 439,772 497,672
Provision for closing a center (Note 6) 400,000 731,502
Provision for write-down of assets (Note 6) 5,587,563
Provision for settlement of legal matters (Note 13) 2,000,000
------------ ----------- -----------
Total operating expenses 20,454,121 10,531,031 12,288,970
------------ ----------- -----------
Loss from operations (13,524,768) (3,110,184) (1,699,438)
------------ ----------- -----------
Other income (expense)
Interest income 975,450 1,017,539 2,038,022
Interest income--related party (Note 4) 256,926 239,858 299,175
Interest expense (1,021,569) (1,251,306) (1,728,553)
Loss on sale of investments in marketable securities (554,889)
Equity in income (loss) of affiliate (Note 4) (72,580) (102,863) 72,246
Provision for loss on sale of investment in affiliate
(Note 4) (3,989,764)
Gains (losses) on investments in managed centers, net
(Note 5) 394,739 (261,475)
Rental income--related party (Note 4) 188,644 141,482 151,957
Other 28,257 59,713 34,190
------------ ----------- -----------
Other income (expense)--net (3,794,786) (157,052) 867,037
------------ ----------- -----------
Loss before income taxes and extraordinary item (17,319,554) (3,267,236) (832,401)
Provision for income taxes--current 22,264 50,004 120,750
---------- --------- ----------
Loss before extraordinary item $(17,341,818) $(3,317,240) $ (953,151)
Extraordinary item--loss on early extinguishment of
debt (Note 8) (433,110)
------------ ----------- -----------
Net loss $(17,774,928) $(3,317,240) $ (953,151)
============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-49
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the year ended December 31, 1994, the nine months ended December 31, 1993
and the year ended March 31, 1993
<TABLE>
<CAPTION>
Unrealized
Losses on
Investments
Common Stock Additional in Total
---------------------- Paid-in Accumulated Marketable Treasury Stockholders'
Shares Amount Capital Deficit Securities Stock Equity
--------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance March
31, 1992 15,649,957 $156,500 $60,880,484 $ (41,716) $ 60,995,268
Issuance of
common stock
for
acquisitions
(Note 14) 2,143,210 21,432 12,670,082 12,691,514
Issuance of
warrants
(Note 9) 133,233 133,233
Exercise of
warrants (Note
9) 180,000 1,800 1,800
Exercise of
stock options 79,000 790 79,737 $ 3,473 84,000
Purchase of
common stock
(Note 9) (1,475,973) (1,475,973)
Issuance of
treasury stock
to 401(k)
Savings Plan
(Note 11) (917) 32,541 31,624
Net loss (953,151) (953,151)
---------- -------- ---------- ------------ -------- ----------- ------------
Balance March
31, 1993 18,052,167 180,522 73,762,619 (994,867) (1,439,959) 71,508,315
Exercise of
stock options (323,029) 466,379 143,350
Purchase of
common stock
(Note 9) (3,469,566) (3,469,566)
Issuance of
treasury stock
to 401(k)
Savings Plan
(Note 11) 1,610 247,631 249,241
Net loss (3,317,240) (3,317,240)
---------- -------- ---------- ------------ -------- ----------- ------------
Balance December
31, 1993 18,052,167 180,522 73,441,200 (4,312,107) (4,195,515) 65,114,100
Exercise of
stock options (53,754) 96,254 42,500
Issuance of
treasury stock
to 401(k)
Savings Plan
(Note 11) (172,083) 375,217 203,134
Unrealized
losses on
investments in
marketable
securities $(20,294) (20,294)
Net loss (17,774,928) (17,774,928)
---------- -------- ---------- ------------ -------- ----------- ------------
Balance December
31, 1994 18,052,167 $180,522 $73,215,363 $(22,087,035) $(20,294) $(3,724,044) $ 47,564,512
========== ======== =========== ============ ======== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-50
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December Year Ended
December 31, 31, March 31,
1994 1993 1993
------------ ----------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(17,774,928) $ (3,317,240) $ (953,151)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 6,188,767 4,730,757 5,378,251
Provision for doubtful accounts 936,019 876,923 1,362,835
Provision for closing a center--noncash items 400,000 666,975
Loss on sale of property and equipment 272,483
Equity in (earnings) loss of affiliate 72,580 102,863 (72,246)
Provision for loss on sale of investment in affiliate 3,989,764
Provision for write-down of assets 5,587,563
Losses on sale of investments in marketable securities 554,889
(Gain) loss on investments in managed centers (394,739) 261,475
Issuance of stock to 401(k) Savings Plan 203,134 249,241 31,624
Extraordinary item--loss on extinguishment of debt 433,110
Other noncash expenses 48,374 54,421 68,862
Change in assets and liabilities, net of effect of
acquisitions:
Patient accounts receivable (225,054) 19,679 (2,486,785)
Receivable from affiliate 508,101 331,255 293,886
Accrued interest receivable 53,292 64,989 30,290
Other current assets 120,940 783,710 (718,183)
Accounts payable and accrued expenses 81,685 (1,040,228) 1,057,589
Income taxes payable 16,629 18,206 8,700
------------ ------------ ------------
Cash provided by operating activities 800,126 3,803,026 4,274,155
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of investments (6,648,837) (5,034,829) (30,902,953)
Sales of investments 14,129,871 6,280,485 4,672,182
Maturities of investments 6,638,754 12,006,914 12,627,900
Additions to property and equipment, net (751,746) (5,772,347) (14,436,434)
Proceeds from the sale of property and equipment 2,658,072 -- 162,218
Distributions from affiliate -- 110,500 58,500
Note receivable 375,000 (375,000) --
Deposits and other assets 285,974 (316,131) (638,437)
Investments in managed centers -- (1,271,835) --
Disposition of investments in managed centers 1,405,099 -- --
Cash payments for acquisitions, net of cash acquired -- -- (2,606,195)
------------ ------------ ------------
Cash provided by (used in) investing activities 18,092,187 5,627,757 (31,063,219)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of treasury stock 42,500 143,350 85,800
Payments on long-term debt (10,853,032) (6,349,033) (1,087,979)
Payments on capital lease obligations (935,071) (670,743) (979,100)
Proceeds from issuance of long-term debt -- -- 1,800,000
Payments of stock offering costs -- -- (164,678)
Payments of debt issue costs -- -- (30,165)
Treasury stock acquired -- (3,469,566) (1,475,973)
------------ ------------ ------------
Cash used in financing activities (11,745,603) (10,345,992) (1,852,095)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 7,146,710 (915,209) (28,641,159)
Cash and cash equivalents, beginning of period 2,801,139 3,716,348 32,357,507
------------ ------------ ------------
Cash and cash equivalents, end of period $ 9,947,849 $ 2,801,139 $ 3,716,348
============ ============ ============
Supplemental disclosures of cash flow information:
Interest paid (net of amount capitalized) $ 1,004,143 $ 1,204,621 $ 1,602,952
============ ============ ============
Income taxes paid $ 5,635 $ 31,798 $ 112,050
============ ============ ============
Capital lease obligations $ -- $ -- $ 1,906,599
============ ============ ============
Issuance of common stock and liabilities assumed in
connection with acquisitions (Note 14)
</TABLE>
Supplemental disclosures of noncash investing and financing activities:
Included in accounts payable at December 31, 1993 and March 31, 1993 are
amounts related to the purchase of property and equipment totaling $724,964
and $2,604,019, respectively.
See notes to consolidated financial statements.
F-51
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 1994, the nine months ended December 31, 1993
and the year ended March 31, 1993
1. ORGANIZATION & MERGER WITH ONCOLOGY THERAPIES, INC.
Radiation Care, Inc. ("RCI") and its wholly owned subsidiaries
(collectively the "Company") provide outpatient radiation therapy and
diagnostic imaging services. The Company was incorporated in November 1990
and began treating patients in June 1991. The Company owns and operates
seventeen radiation therapy centers and three diagnostic imaging centers, and
owns a 65% interest in a fourth diagnostic imaging center (sold January 31,
1995--see Note 4).
On November 21, 1994, the Company entered into an agreement to merge with
Oncology Therapies, Inc. in a transaction in which the Company's stockholders
will receive $2.625 in cash for each outstanding share of the Company's
common stock. The merger was completed on March 21, 1995. The Company
incurred approximately $2,500,000 of expenses, of which $1,424,393 were
charged to 1994 operations, associated with structuring and completing the
merger. This amount includes financial advisor fees, legal and accounting
fees, certain liability insurance premiums, severance payments, and expenses
for printing, mailing, and processing related to consummation of the merger.
The Company had change-in-control agreements with its senior officers. The
merger constitutes a change in control pursuant to such agreements. Total
payments that resulted from such agreements approximated $345,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year. Effective December 31, 1993, the Company adopted a fiscal
year ending on December 31. Accordingly, the resulting transition period,
which ended December 31, 1993, covers a nine month period.
Principles of Consolidation. The consolidated financial statements include
the accounts of RCI and its wholly owned subsidiaries. All intercompany
transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents. For the purposes of the statement of cash
flows, the Company considers all highly liquid instruments purchased with
original maturities of three months or less to be cash equivalents.
Investments. The equity method of accounting is used for investments when
the Company has a noncontrolling ownership interest in another company that
is greater than 20%. Under the equity method of accounting, original
investments are recorded at cost and adjusted by the Company's share of
undistributed earnings or losses of such companies and the amortization of
underlying intangibles.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The Statement addresses the accounting for investments in
equity securities that have readily determinable fair values and for all
investments in debt securities. The Company has classified its investments in
marketable securities as available-for-sale securities which, under the
Statement, are reported at fair value with unrealized gains and losses
excluded from earnings and reported as a separate component of stockholders'
equity. There was no cumulative effect of this change in accounting
principle. Gains or losses on the sale of investments in marketable
securities are determined by specific identification of the cost of the
securities sold.
Provision for Doubtful Accounts. The Company records a provision for
doubtful accounts for the portion of unrecognized revenues which it estimates
may not be ultimately collected. The provision includes any contractual
adjustments in excess of those estimated at the time revenue is recognized
and other differences between recorded revenues and collections from
third-party payors and patients. The provision and related allowance are
adjusted periodically, based upon the Company's evaluation of historical
collection experience with specific payors for particular services,
anticipated reimbursement levels with specific payors for new services for
which the Company may not have had significant historical collection
experience, industry reimbursement trends, and other relevant factors.
F-52
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment. Property and equipment is stated at cost. The cost
and related accumulated depreciation of property and equipment sold or
otherwise disposed are eliminated from the accounts and the resulting gains
or losses are reflected in income. Depreciation is generally computed using
the straight-line method over the estimated useful life of an asset. Assets
recorded under capital leases are amortized over their estimated useful lives
or the lease terms, as appropriate.
Goodwill. The excess of the purchase price over the fair value of the net
assets acquired in business combinations accounted for by the purchase method
is amortized on a straight-line basis over a 25-year period. The Company
periodically assesses the recoverability of goodwill, when there are
indications of potential goodwill impairment based on estimates of
undiscounted future cash flows from operations for the applicable business
acquired. The amount of impairment is calculated by comparing anticipated
discounted future income from acquired businesses with the carrying value of
the related goodwill. In performing this analysis, management considers such
factors as current results, trends and future prospects, in addition to other
economic factors (see Note 6).
The Company is required to implement Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" in 1996. As the Company currently
continually evaluates the realizability of its long-lived assets, including
goodwill and intangibles, adoption of the statement is not anticipated to
have a material effect on the Company's financial statements at the date of
adoption.
Organization Costs. Organization costs are being amortized on a
straight-line basis over a five-year period.
Income Taxes. Deferred income taxes are determined based on the difference
between financial statement and tax bases of assets and liabilities using
enacted rates in effect for the year in which the differences are expected to
reverse. To the extent management is uncertain that deferred tax assets will
be realized, a valuation allowance is established.
Debt Issue Costs. Debt issue costs are deferred and are being amortized
using the interest method over the term of the related debt.
Revenue Recognition. Patient revenues are recognized net of contractual
adjustments and represent the estimated net realizable amounts from
third-party payors and patients for services rendered.
Charity Care. The Company has a policy of providing charity care to
patients who are unable to pay for the Company's services. Since the Company
does not expect payments from such patients, estimated charges for charity
care are not included in patient revenues.
Reclassifications. Certain reclassifications have been made to the prior
years' financial statements to conform to the presentation in the December
31, 1994 financial statements.
3. INVESTMENTS IN MARKETABLE SECURITIES
The market value of investments in marketable securities was $207,107 and
$14,929,560 at December 31, 1994 and 1993, respectively. At December 31, 1993
gross unrealized gains and losses on investments in marketable securities
were $89,046 and $61,564, respectively.
4. INVESTMENT IN AFFILIATE AND RECEIVABLE FROM AFFILIATE
The Company has a 65% limited partnership interest in ParkView Imaging
Center, L.P. ("PVIC"). This noncontrolling limited partnership interest is
accounted for using the equity method of accounting. The difference between
the Company's recorded investment balance and the Company's proportionate
share of the underlying
F-53
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
equity in the net assets of PVIC at December 31, 1994 was $427,564.
Summarized financial data of PVIC as of December 31, 1994 and 1993 and for
the year ended December 31, 1994 and the nine months ended December 31, 1993
follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1994 1993
--------- -----------
<S> <C> <C>
Balance Sheet Data:
Total current assets $ 888,060 $ 620,214
Property and equipment, net 1,754,865 2,017,116
Other assets 12,353 19,323
---------- ----------
Total assets $2,655,278 $2,656,653
========== ==========
Total current liabilities $ 836,223 $ 650,976
Total long-term liabilities 965,456 1,428,051
Total partners' capital 853,599 577,626
---------- ----------
Total liabilities and partners' capital $2,655,278 $2,656,653
========== ==========
Income Statement Data:
Patient revenues, net $2,140,946 $1,720,667
Cost of revenues and expenses 1,853,132 1,638,258
---------- ----------
Net income $ 287,814 $ 82,409
========== ==========
</TABLE>
The Company leased equipment to PVIC under a noncancellable long-term
lease accounted for by the Company as a direct financing lease. The Company
recognized interest income of $256,926, $239,858 and $299,175 related to the
leasing facility for the year ended December 31, 1994, the nine months ended
December 31, 1993 and the year ended March 31, 1993, respectively.
Additionally, the Company leased certain office space to PVIC. Such lease is
accounted for as an operating lease and the Company recognized $188,644,
$141,482 and $151,957 of rental income for the year ended December 31, 1994,
the nine months ended December 31, 1993 and the year ended March 31, 1993,
respectively. Future minimum lease payments due from PVIC together with the
present value of future minimum lease payments under the equipment leases
from affiliate are as follows:
<TABLE>
<CAPTION>
Direct
Year Ended December 31, Financing Operating
- ------------------------------------------------------ -------- ----------
<S> <C> <C>
1995 $ 761,484 $188,634
1996 761,484 188,634
1997 63,458
---------- ---------
Total 1,586,426 $377,268
========
Less amounts representing interest and executory costs (227,788)
----------
Present value of minimum receipts 1,358,638
Less current portion (596,023)
----------
Receivable from affiliate, long-term portion $ 762,615
==========
</TABLE>
In November 1994, the Company agreed to sell Community Clinicians Leasing,
L.P. ("CCL") which included its investment in PVIC to The Columbia HCA Health
System for $1,250,000. In December 1994, the agreement was revised and the
sales price was reduced by $250,000 to $1,000,000. The Columbia HCA Health
System was the general partner of PVIC and owned the remaining 35% interest
in PVIC. During the year ended December 31, 1994, the Company provided for an
anticipated loss on sale of its investment in affiliate of $3,989,764 as a
result of this agreement. This amount represents the difference between the
Company's recorded investment balance and the agreed-upon sales price of CCL.
The transaction was completed on January 31, 1995.
F-54
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. INVESTMENTS IN MANAGED CENTERS
The Company entered into agreements in 1993 to manage three radiation
therapy centers, one that had begun operations and two that were under
development. The centers were independently owned. These agreements had a
four-year term during which the Company was to manage the operations of the
centers for a fee based on a percentage of collected revenues. In addition,
the Company entered into agreements that provided the Company with the option
to purchase each of the centers, based on an agreed pricing computation, for
a period of two years beginning eighteen months after the projected opening
date of each center. Consideration for the purchases could be in cash or
common stock of the Company to be negotiated at the time of the purchase. The
Company paid $100,000 per center as consideration for the purchase options.
The Company loaned the centers amounts for working capital requirements,
provided certain temporary financing for building improvements, and provided
certain financing for the acquisition of real estate. The loans for working
capital requirements and the loans for the acquisition of real estate were
expected to be repaid from future operating cash flows of the centers. The
loans for building improvements were expected to be repaid through permanent
financing at the completion of construction. As of December 31, 1993, the
Company had advanced a total of $1,271,835 under these loan agreements at an
interest rate of 7%.
Due to the nature of the Company's relationship with the managed centers,
including the loan arrangements and the options to purchase the centers, the
amounts loaned to the centers were accounted for similar to equity method
investments. As a result of this accounting treatment, the Company was
required to record any start-up losses, and subsequent operating income to
the extent of previously recognized losses, of the managed centers as gains
or losses on the investments in managed centers in the period in which the
income or losses of the centers is recognized. During the year ended December
31, 1994 and the nine months ended December 31, 1993, the Company recognized
losses on investments in managed centers of $367,283 and $261,475,
respectively. The cumulative amount of any potential losses on the
investments was limited to the amount invested in each center. The Company
did not guarantee any debt of the managed centers and was not at risk beyond
its investment balance. See Note 7 regarding machinery and equipment sold to
centers under development which the Company manages.
In April 1994, the Company and the owners of the managed centers agreed to
terminate the management agreements and the purchase option agreements. All
loans to the managed centers and accrued interest were repaid to the Company.
The consideration paid for the purchase options also was refunded. In
addition, the Company received agreed-upon management fees for two of the
centers that had begun operations. Accordingly, the Company reversed all
previously recorded losses on investments in managed centers in April 1994.
During the year ended December 31, 1994, the Company recognized a gain on
investments in managed centers totaling $762,022, which included the reversal
of previously recorded losses, interest income on the loans to the managed
centers, and management fees. Subsequent to termination of the management
agreements, there are no outstanding amounts due from or to the managed
centers and the Company has no further obligations with regard to the
financing or management of the operations of the managed centers.
6. PROVISION FOR WRITE-DOWN OF ASSETS
During the year ended December 31, 1994, the Company incurred a charge of
$5,587,563 which includes a provision for write-off of unamortized goodwill
at one of the Company's diagnostic imaging centers of $3,915,932 and the
write-down of property and equipment at two of the Company's radiation
therapy centers of $1,671,631. The provision for write-off of goodwill and
write-down of property and equipment was a result of management's continuing
assessment of the recoverability of assets based on estimates of future
undiscounted cash flows from operations of the applicable businesses. During
the year ended December 31, 1994, such assessment considered the impending
merger with Oncology Therapies, Inc. discussed in Note 1, the impending
effects of contingencies discussed in Note 13, continuing operating losses at
the individual centers and management's determination that the operating
losses were likely to continue for the foreseeable future. Such assessment
considered the effects of the above events on all the Company's long-lived
assets on a center-by-center basis. Prior to 1994, the Company
F-55
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
did not believe the likelihood of adverse effects on the Company, as a result
of Omnibus Budget Reconciliation Act of 1993 ("OBRA 1993"), were probable.
Management's assessment of the likelihood of adverse effects associated with
OBRA 1993 became probable during 1994 as a result of management concluding
that the Company would be unable to meet the public company exemption under
OBRA 1993. It was in light of such events that management estimated and
recognized asset impairments during 1994. The write-down of property and
equipment included medical equipment and leasehold improvements at centers
located in Rockville, Maryland and Falls Church, Virginia. In addition, the
Company recorded a charge of $400,000 related to costs associated with the
probable closing of one of the radiation therapy centers. The amount of the
provision is primarily for estimated lease termination costs.
In September 1993, the Company made the decision to close its radiation
therapy center in Columbia, South Carolina. The center, which had been
operating for two years, had not treated a sufficient volume of patients to
attain profitability, and management determined that it was not likely to
become profitable in the foreseeable future. Losses were minimized by
transferring equipment and miscellaneous furnishings and supplies to new
centers. The provision for expenses related to the closing of the center was
$731,502, which included the write-off of certain leasehold improvements of
$593,929, transportation and storage costs of $70,750, severance compensation
to employees of $32,823, and other miscellaneous expenses of $34,000.
7. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
Estimated
Useful
Life December 31,
----------------------------
(years) 1994 1993
------- ----------- -------------
<S> <C> <C> <C>
Machinery and equipment 4 - 10 $ 31,441,163 $ 34,215,689
Leasehold improvements 10 - 12 12,034,679 13,400,465
Computers 5 2,726,629 2,713,741
Furniture and fixtures 5 - 7 841,393 864,458
Automobiles 3 - 5 188,600 208,649
------------ ------------
Total 47,232,464 51,403,002
Less accumulated depreciation and amortization (17,164,220) (12,098,524)
------------ ------------
Property and equipment, net $ 30,068,244 $ 39,304,478
============ ============
</TABLE>
Included in machinery and equipment at December 31, 1993 are assets with a
total cost of $2,946,171 and total accumulated depreciation of $491,373 which
were taken out of service and sold to centers under development which the
Company managed in 1994 (see Note 5). No losses on the transfer and sale of
such equipment were recognized.
The Company capitalizes interest as a component of the cost of the
property and equipment constructed for its own use. Interest of $33,070 and
$67,014 was capitalized during the nine months ended December 31, 1993 and
the year ended March 31, 1993, respectively.
Included in machinery and equipment at December 31, 1994 and 1993 are
assets under capital leases of $4,580,943 at both dates with accumulated
amortization of $2,752,035 and $1,763,909, respectively.
Depreciation expense, including amortization of capital lease assets, was
$5,658,276, $4,306,120, and $4,880,579 for the year ended December 31, 1994,
the nine months ended December 31, 1993 and the year ended March 31, 1993,
respectively.
F-56
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. LONG-TERM DEBT
The Company had a $15,000,000 credit agreement with a commercial bank. The
credit agreement, as amended, consisted of a $10,000,000 term loan and a
$5,000,000 revolving credit facility. At December 31, 1993, the Company had
$3,800,000 available to borrow under the revolving credit facility. Under the
agreement, the Company had the option of making "Eurodollar" loans or "Base
Rate" loans. Eurodollar loans bore interest at a fixed rate per annum equal
to LIBOR for the current interest period plus 2-3/4% (an interest period may
be one, two, three, or six months, as selected by the Company). Base Rate
loans bore interest at a rate per annum, fluctuating daily, equal to the
higher of the prime rate plus 1-1/2% or the federal funds rate plus 2%.
Interest on Eurodollar loans was payable at the end of the applicable
interest period and interest on Base Rate loans was payable monthly. At
December 31, 1993 there was outstanding under the credit agreement
$10,200,000 bearing interest at rates ranging from 6.01% to 6.19%.
Patient accounts receivable and certain property and equipment were
pledged as collateral under the credit agreement. In addition, the Company
was required to meet certain financial covenants primarily related to net
worth and long-term debt. The agreement also limited the amount of dividends
that could be paid by the Company.
The aggregate principal amount of the term loan was payable in quarterly
installments of $500,000 which commenced on September 30, 1993. In September
1994, the Company repaid all outstanding indebtedness under its credit
agreement. In connection with the cancellation of the credit agreement, the
Company recognized an extraordinary loss of $433,110 during the year ended
December 31, 1994. The extraordinary loss represents the write-off of the
remaining balances of $272,119 of debt discount and $160,991 of debt issue
costs associated with the credit agreement.
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1994 1993
--------- ------------
<S> <C> <C>
Borrowings under the credit agreement described above, net of unamortized
discount of $320,493 at December 31, 1993 $ 9,879,507
Notes payable to a financial institution, due in monthly installments of
$74,177 including interest ranging from 10.5% to 12.0% through January
1997. Certain property and equipment are pledged as collateral on the
notes $1,571,491 2,224,523
---------- -----------
Total 1,571,491 12,104,030
Less amounts due within one year (737,832) (2,653,033)
---------- -----------
Long-term debt $ 833,659 $ 9,450,997
========== ===========
</TABLE>
At December 31, 1994, scheduled aggregate long-term debt maturities were
$737,832 in 1995 and $833,659 in 1996.
9. COMMON STOCK AND WARRANTS
In February 1992, the Company sold 6,250,000 shares of common stock at $8
a share in its initial public offering. On September 4, 1992, the
stockholders of the Company approved an increase in the authorized number of
the Company's common shares to 50,000,000.
In September 1992, the Company's Board of Directors authorized the use of
up to $5,000,000 to purchase the Company's common shares in the open market,
from time to time. During 1992 and 1993, the Company purchased 2,088,792
shares for a total of $4,945,539, of which 259,137 shares have been
contributed to the Company's 401(k) Plan and 185,350 shares have been used
for options exercised by employees. At December 31, 1994, the remaining
1,644,305 shares are being held as treasury shares.
F-57
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the year ended March 31, 1992, the Company issued to its lending
bank warrants to purchase 356,067 shares of the Company's common stock or
preferred stock at a price of $.01 per share. The difference of $352,506
between the fair value of the warrants (valued at $1.00 per warrant or
$356,067 in total) and the exercise price ($.01 per warrant or $3,561 in
total) has been charged to discount on debt and has been credited to
additional paid-in capital. On June 11, 1992, the Company agreed to issue an
additional 93,933 warrants to its lending bank, of which 16,675 are
exercisable at $.01 per share and 77,258 are exercisable at $8 per share. The
difference of $133,233 between the fair value of the 16,675 warrants (valued
at $8 per warrant or $133,400 in total) and the exercise price ($.01 per
warrant or $167 in total) has been charged to discount on debt and has been
credited to additional paid-in capital. The warrants may be exercised at any
time through June 1, 2001 and the number of warrants issued are subject to
adjustment in certain events to prevent dilution. The Company has granted the
holder of the warrants certain rights with respect to the registration under
the Securities Act of 1933 of the warrants and the shares issuable upon their
exercise. During the year ended March 31, 1993, 180,000 warrants were
exercised at $.01 per share. At December 31, 1994, 192,742 warrants
exercisable at $.01 per share and 77,258 warrants exercisable at $8.00 per
share were outstanding.
10. INCOME TAXES
The Company has elected, for income tax purposes, a March 31 year end. At
December 31, 1994 the Company had available net operating loss carryforwards
of approximately $27,945,000 for federal income tax purposes, which expire
beginning in 2007. As a result of the merger discussed in Note 1, the Company
underwent an ownership change as defined in Section 382 of the Internal
Revenue Code of 1986, as amended. This ownership change substantially limits
the ability of the Company to utilize its net operating loss carryforwards in
future years.
Income tax computed at the federal statutory rate for the year ended
December 31, 1994, for the nine months ended December 31, 1993, and for the
year ended March 31, 1993 differs from the amount provided as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
December 31, 1994 December 31, 1993 March 31, 1993
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Tax (benefit) at statutory rate $(5,888,648) (34.0)% $(1,110,860) (34.0)% $(283,016) (34.0)%
State taxes, less federal tax
effect (571,545) (3.3) (107,448) (3.3)
Surtax exemption (8,414) (1.0)
Change in valuation allowance 4,598,162 26.5 1,047,001 32.0 117,140 14.1
Nondeductible amortization and
write-off of intangibles 1,548,642 8.8 214,060 6.6 203,822 24.5
Merger expense 484,294 2.8
Other (148,641) (0.8) 7,251 0.2 91,218 10.9
----------- ----- ------------ ----- --------- -----
Provision for income taxes $ 22,264 -- $ 50,004 1.5% $ 120,750 14.5%
=========== ===== ============ ===== ========= =====
</TABLE>
Components of deferred income taxes at December 31, 1994 and 1993 are as
follows:
<TABLE>
<CAPTION>
1994 1993
---------- ------------
<S> <C> <C> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards $10,898,834 $5,336,764
Start-up costs 111,458 185,091
Allowance for doubtful accounts 163,079 182,067
Other 552,418 590,175
----------- ----------
11,725,789 6,294,097
----------- ----------
F-58
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1994 1993
---------- ------------
Deferred income tax liabilities:
Property and depreciation (5,101,717) (4,268,188)
---------- ----------
Valuation allowance (6,624,072) (2,025,909)
---------- ----------
Net deferred income taxes $ -- $ --
========== ==========
</TABLE>
Increases in the Company's valuation allowance during the year ended
December 31, 1994 reflect management's assessment of the Company's ability to
realize, in future periods, deferred tax assets.
11. EMPLOYEE BENEFITS
401(K) Savings Plan. Effective March 1, 1993, the Company adopted a voluntary
savings plan for eligible employees under Section 401(k) of the Internal
Revenue Code, whereby participants may contribute a percentage of their
compensation up to the maximum annual amount allowed under the Code. The plan
provides for matching contributions by the Company of the first 5% of salary
contributed by the employee. The Company's contributions are made on a
quarterly basis with the Company stock which vests upon the completion of
three years of service by the employee.
Expense recorded for the savings plan was $203,134, $249,241, and $31,624
for the year ended December 31, 1994, the nine months ended December 31,
1993, and the year ended March 31, 1993, respectively.
Stock Option Plan. The Company's 1991 Amended and Restated
Statutory-Nonstatutory Stock Option Plan (the "Plan") permits the Company to
grant statutory and non-statutory options to purchase shares of common stock
to certain directors, officers, and other key employees of the Company as
well as certain consultants and advisors. There are 3,500,000 shares of the
Company's common stock reserved for issuance under the Plan. Options
generally become exercisable over a three-year period, with a portion of the
shares issuable pursuant to each option becoming exercisable at each
anniversary of the grant. The options expire ten years after the date of
grant.
During 1994, the Company approved a plan to offer new option grants to
certain officers and other key employees who had previously received stock
option grants. The plan allowed employees the opportunity to cancel their
previous grant and receive a new grant of stock options. The number of shares
that may be purchased under the new stock option grant was determined by a
formula based on the relationship of the exercise price of the previous grant
to the closing price of the Company's common stock on February 1, 1994, the
date of the new option grant. Participation in the exchange of stock option
grants by employees was completely voluntary. The total number of options
outstanding that were eligible for exchange was 638,400 with exercise prices
ranging from $2.75 to $12.75. The total number of options exchanged was
391,400 with exercise prices ranging from $2.75 to $12.75. In return for the
options exchanged, 166,646 new options were issued at an exercise price of
$2.13 and the previously issued options were cancelled.
In March 1995, in connection with the merger of the Company with Oncology
Therapies, Inc. (see Note 1), the Company approved a plan to loan to
employees the proceeds necessary to exercise all vested options and
simultaneously repurchase the shares of common stock issued in connection
with the exercise of such options and repay the amounts loaned to employees.
This plan was executed simultaneously with the closing of the merger. In
total, $1,414,548 was loaned to employees and subsequently repaid to the
Company and options to purchase 771,669 shares of common stock were exercised
with exercise prices ranging from $1.00 to $2.13. These shares of common
stock were then repurchased by the Company at a merger consideration of
$2.625 per share. All other outstanding options were canceled as part of the
merger agreement.
12. RELATED PARTY TRANSACTIONS
The Company had, through September 1993, an office lease agreement for one
of its centers with a corporation, the stock of which is owned in part by the
former chairman of the Company. Rental expense of $32,000 and $48,000 was
incurred on this lease during the nine months ended December 31, 1993 and the
year ended March 31, 1993, respectively.
F-59
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has entered into an office lease agreement for one of its
centers with a corporation, the stock of which is owned in part by a former
director of the Company. Rental expense of $101,328, $74,473, and $94,800 was
incurred on this lease for the year ended December 31, 1994, for the nine
months ended December 31, 1993, and for the year ended March 31, 1993,
respectively.
In March 1992, the Company began leasing an airplane for use in managing
its centers and investigating acquisition and development opportunities, some
of which are not accessible to commercial aircraft, from a corporation that
is primarily owned by the former chairman of the Company at the rate of
$7,000 per month. Rental expense of $84,000, $63,000, and $84,000 was
incurred on this lease for the year ended December 31, 1994, for the nine
months ended December 31, 1993, and for the year ended March 31, 1993,
respectively. The Company incurred other third-party costs in connection with
the operation of the leased airplane.
Prior to the merger, CTC had entered into a service contract with an
entity, related by common owners, to provide technical services. CTC paid a
monthly fee based on the number of scans read. Expenses included in cost of
revenues related to this contract were $502,878, $392,422, and $632,083 for
the year ended December 31, 1994, the nine months ended December 31, 1993 and
the year ended March 31, 1993, respectively.
CTC owns a 2.5% interest in a limited partnership that leases office space
to the Company under an agreement that expires in September 1995. Rental
expense related to this space was $80,722, $62,918, and $81,341 for the year
ended December 31, 1994, the nine months ended December 31, 1993 and the year
ended March 31, 1993, respectively.
13. COMMITMENTS AND CONTINGENCIES
The Company leases office space, generally under ten-year noncancelable
operating lease agreements. The lease agreements contain escalation clauses
for increases in operating costs. In addition, the Company leases an airplane
under a noncancelable operating lease with a related party and certain
machinery and equipment under capital and operating leases. Aggregate future
minimum lease commitments under operating leases and capital leases with an
initial or remaining lease term in excess of one year, including amounts
payable to related parties, together with the present value of the minimum
capital lease payments at December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Operating Capital
Year Ending December 31, Leases Leases
- ------------------------------------------------------ ---------- -----------
<S> <C> <C>
1995 $ 1,932,266 $1,129,993
1996 1,890,832 783,403
1997 1,735,852 317,018
1998 1,656,045 304,935
1999 1,630,129 25,361
Thereafter 6,160,418 --
----------- ----------
Total $15,005,542 2,560,710
===========
Less amounts representing interest and executory costs (355,223)
Present value of minimum payments 2,205,487
Less current portion (952,989)
----------
Long-term portion of capital lease obligations $1,252,498
==========
</TABLE>
Rental expense, including rent paid to related parties, for the year ended
December 31, 1994, the nine months ended December 31 1993, and the year ended
March 31, 1993 was $2,153,924, $1,616,981, and $1,823,471, respectively.
F-60
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company carries liability insurance covering general and medical
malpractice liability with annual limits of $15 million per occurrence and in
the aggregate with respect to each of its centers. Management believes such
coverage is adequate to cover claims, if any, that may result.
Since June 1992, a federal grand jury sitting in Atlanta, Georgia had been
investigating whether referrals by physicians who are stockholders of the
Company have been in compliance with the Medicare law. Beginning in October
1994, the Company engaged in active negotiations with representatives of the
Federal Government to resolve the matters that have been the subject of this
investigation of the Company. On December 15, 1994, the Company and the
Federal Government entered into an agreement to settle the grand jury
investigation. Under the terms of the settlement, the Company consented to a
civil judgment, providing for its payment of $2,000,000 and an injunction
against violations of the Medicare "anti-kickback" law. In agreeing to the
settlement, the Company did not admit that any of its activities violated the
Medicare law or any other law. An expense of $2,000,000 related to the
settlement is included in the Company's statement of operations for the year
ended December 31, 1994.
On February 16, 1995, six former stockholders of RCI filed a consolidated
amended Class Action Complaint in Delaware Chancery Court (In re Radiation
Care, Inc. Shareholders Litigation. Consolidated C.A promptly. No. 13805)
against RCI. Thomas Haire, Gerald King, Charles McKay, Abraham Gosman.
Oncology Therapies of America, Inc. ("OTA") and A.M.A. Financial Corporation,
("AMA") alleging that the RCI stockholders should have received greater
consideration for their RCI stock when RCI was merged with and into the
Company. Plaintiffs allege breaches of fiduciary duty by the former RCI
directors, as well as aiding and abetting such fiduciary duty breaches by Mr.
Gosman, OTA and AMA. Plaintiffs seek compensatory or recissionary damages of
an undisclosed amount on behalf of all RCI stockholders, together with an
award of the costs and attorneys' fees associated with the action. No class
has been certified in this litigation and plaintiffs' counsel have granted an
indefinite extension for the defendants to answer or otherwise respond to the
Complaint. Plaintiffs have taken no discovery and there has been virtually no
activity in the litigation since plaintiffs' filing of the consolidated
amended Class Action Complaint. The Company intends to file an answer denying
any liability in connection with this litigation.
On August 4, 1995, 26 former stockholders of RCI filed a Complaint for
Money Damages against Richard D'Amico, Ted Crowley, Thomas Haire, Gerald
King, Charles McKay and Randy Walker (all former RCI officers and directors)
in the Superior Court of Fulton County, in the State of Georgia (Southeastern
Capital Resources, L.L.C. et al. v. Richard D'Amico et al., Civil Action No.
E41225). Two of the plaintiffs have withdrawn from the litigation. Plaintiffs
allege a breach of fiduciary duty by the former RCI directors Haire, King and
McKay, a "conspiracy" by the RCI officer defendants D'Amico, Crowley and
Walker, and negligence by all defendants. Plaintiffs seek additional
consideration for their shares of RCI common stock in the form of
compensatory and monetary damages in the amount of $5.7 million, plus
punitive damages, interest, costs and attorneys fees. On September 22, 1995,
the defendants filed an Answer denying any liability in connection with this
matter.
On September 18, 1995, two former stockholders of RCI filed a Complaint
for Money Damages against RCI, OTA, Mr. Haire, Mr. King and Mr. McKay in the
Superior Court of Fulton County in the State of Georgia (Dennis E. Ellingwood
and Gregory W. Cotter v. Oncology Therapies, Inc., et al., Civil Action No.
34 727-E191464). Plaintiffs allege negligence, negligent misrepresentation
and a breach of fiduciary duty by former RCI directors Haire, King and McKay
and by RCI and OTA on the principles of respondeat superior. Plaintiffs seek
compensatory money damages in an amount of not less than $165,925 for one
plaintiff and $32,997 for the other, plus punitive damages, interest, costs
and attorneys fees. Plaintiffs allege essentially that they were induced to
invest in RCI as a result of a variety of misrepresentations and material
omissions made by RCI in its communications with its stockholders.
The Company believes that it has meritorious defense in all the
above-described pending actions. Although the resolution of these matters may
have a material adverse effect on the Company's financial condition, results
of operations and liquidity, the ultimate outcome of the litigation described
in the preceding three paragraphs cannot presently be determined.
Accordingly, no provision for any loss that may result upon resolution of
these suits has been made in the consolidated financial statements.
F-61
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A substantial portion of the Company's revenues has historically been
derived from patients referred to its centers by physicians who are
stockholders of the Company, and loss of such referrals would have a material
adverse effect on the future operations of the Company. In August 1993, OBRA
1993 was enacted. OBRA 1993 contains provisions that will, beginning January
1, 1995, restrict most physicians from referring Medicare or Medicaid
patients to radiation therapy and diagnostic imaging providers in which they
have a financial interest. OBRA 1993 contains an exemption for a financial
interest consisting of the ownership of investment securities that may be
purchased on terms generally available to the public in a company with $75
million of stockholders' equity as of its most recent fiscal year on or
preceding December 31, 1994 and with securities listed on a national trading
market, including NASDAQ. As of December 31, 1994, the Company's
stockholders' equity was approximately $47.6 million. Due to the merger
discussed in Note 1, the Company's management does not believe OBRA 93 will
adversely affect the Company's future operations.
14. ACQUISITIONS
On April 3, 1992, the Company exchanged 543,675 shares of its common stock
for all of the outstanding shares of common stock of Computerized Tomography
Center, Inc. ("CTC"). CTC operates an outpatient diagnostic imaging facility.
The combination has been accounted for as a pooling of interests and the
historical financial statements of the Company have been restated to include
the operations of CTC.
On May 8, 1992, the Company purchased the net assets of Peachtree Medical
Diagnostics Center ("PMDC"), a center of Peachtree Medical Diagnostics, L.P.,
for a total purchase price of approximately $3,951,950 (before acquisition
costs of $73,246), payable with 395,195 shares of the Company's common stock.
PMDC operates an outpatient diagnostics imaging facility. The excess of the
purchase price over the fair value of the net assets was $4,340,208. The
Company assumed liabilities of $1,416,000 in connection with the acquisition.
The acquisition has been accounted for as a purchase and has been included in
the Company's operations from May 8, 1992.
On May 27, 1992, the Company purchased the common stock of Biltmore
Advanced Imaging Center, Inc. ("BAIC"), which operates an outpatient
diagnostic imaging facility, for a total purchase price of $3,835,000 (before
acquisition costs of $495,000), payable with 464,846 shares of the Company's
common stock. The Company guaranteed by acquiring a letter of credit in the
amount of $3,250,000 that the value of the 464,846 shares to be sold by the
former shareholders of BAIC through January 31, 1993 would be at least
$3,250,000. The Company satisfied its additional purchase price obligation to
such shareholders by paying cash of $1,491,664 in February 1993. The excess
of the purchase price over the fair value of the net assets was $4,605,313.
The Company assumed liabilities of $2,812,000 in connection with the
acquisition. The acquisition has been accounted for as a purchase and has
been included in the Company's operations from May 27, 1992.
On June 10, 1992, the Company purchased the net assets of Community
Clinicians Leasing, L.P. ("CCL") for a total purchase price of $4,760,000
(before acquisition costs of $571,000), payable with 568,358 shares of the
Company's common stock. CCL owns a 65% interest in ParkView Imaging Center,
L.P. ("PVIC"), which operates an outpatient diagnostic imaging facility (see
Note 4). The Company guaranteed that the value of the shares issued would be
a minimum of $3,500,000 on or about the effective date of the Registration
Statement which covered the underlying shares or the Company would issue such
number of additional shares necessary to bring the consideration at that date
to $3,500,000. Accordingly, as of February 11, 1993, the Company issued
293,175 shares of common stock in satisfaction of this obligation. Since the
additional consideration was contingent on the future market value of the
shares issued on June 10, 1992, the issuance of such additional shares does
not result in an increase to the acquisition purchase price or to paid-in
capital. The Company assumed liabilities of $3,097,000 in connection with the
acquisition. The acquisition has been accounted for as a purchase and has
been included in the Company's operations from June 10, 1992.
F-62
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Aegis Health Systems, Inc.
We have audited the accompanying balance sheets of Aegis Health Systems,
Inc. as of December 31, 1994 and 1993, and the related statements of
operations and cash flows for each of the three years in the period ended
December 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aegis Health Systems,
Inc. as of December 31, 1994 and 1993, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1994 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Oklahoma City, Oklahoma
August 24, 1995
F-63
<PAGE>
AEGIS HEALTH SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
March 31,
1995 1994 1993
--------- --------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets
Trade accounts receivable $ 214,450 $ 266,066 $ 284,767
Other current assets 36,429 -- --
---------- ---------- ----------
Total current assets 250,879 266,066 284,767
Property, plant and Equipment, net of accumulated
depreciation 1,318,775 1,397,386 1,574,327
Organizational Costs, net -- -- 1,282
Other Assets 3,114 3,309 3,309
---------- ---------- ----------
Total assets $1,572,768 $1,666,761 $1,863,685
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities
Book overdraft $ 32,234 $ 81,126 $ 43,902
Accounts payable and accrued liabilities 295,942 238,886 210,636
Current maturities of long-term debt 1,110,001 1,040,415 809,838
Current maturities of capital lease obligations 33,120 32,296 242,176
---------- ---------- ----------
Total current liabilities 1,471,297 1,392,723 1,306,552
Long-term obligations
Long-term debt 730,372 913,225 346,599
Capital lease obligations 129,213 137,807 292,525
---------- ---------- ----------
Total liabilities 2,330,882 2,443,775 1,945,676
Commitments and contingencies (Note 7) -- -- --
Stockholder's deficit
Common stock, $1 par, 50,000 shares authorized,
5,001 shares issued and outstanding 5,001 5,001 5,001
Distributions in excess of earnings (763,115) (781,995) (86,992)
---------- ---------- ----------
Total stockholder's deficit (758,114) (776,994) (81,991)
---------- ---------- ----------
Total liabilities and stockholder's deficit $1,572,768 $1,666,761 $1,863,685
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE>
AEGIS HEALTH SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
---------------------- --------------------------------------
1995 1994 1994 1993 1992
--------- --------- ---------- --------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Operating revenues $ 719,313 $ 608,079 $ 2,741,890 $2,034,582 $1,697,313
--------- --------- ----------- ---------- ----------
Costs and expenses
Operating expenses 270,953 215,712 813,404 606,817 491,254
General and administrative
expenses 323,767 304,180 1,212,898 1,119,839 933,488
Interest expense 25,729 45,678 243,049 234,907 173,523
Other expense 4,577 1,610 26,303 10,528 863
--------- --------- ----------- ---------- ----------
Total costs and expenses 625,026 567,180 2,295,654 1,972,091 1,599,128
--------- --------- ----------- ---------- ----------
Net Income (Note 5) 94,287 40,899 446,236 62,491 98,185
Distributions in excess of
earnings, beginning of period (781,995) (86,992) (86,992) (19,944) (71,797)
Distributions to stockholder (75,407) (96,606) (1,141,239) (129,539) (46,332)
--------- --------- ----------- ---------- ----------
Distributions in excess of
earnings, end of period $(763,115) $(142,699) $ (781,995) $ (86,992) $ (19,944)
========= ========= =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
AEGIS HEALTH SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Ended
March 31, Year Ended December 31,
-------------------- ------------------------------------
1995 1994 1994 1993 1992
-------- -------- ---------- -------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net Income $ 94,287 $ 40,899 $ 446,236 $ 62,491 $ 98,185
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 78,611 78,273 315,271 278,766 203,423
Change in assets and liabilities
Increase (decrease) in trade accounts
receivable 51,616 (14,062) 18,701 (160,733) 42,350
Increase (decrease) in other current assets (36,429) (30,965) -- -- 30,621
Increase (decrease) in other assets 195 -- -- 2,966 (1,863)
Increase (decrease) in accounts payable and
accrued liabilities 57,056 74,244 28,250 170,714 9,847
--------- --------- ----------- --------- ---------
Net cash provided by operating activities 245,336 148,389 808,458 354,204 382,563
--------- --------- ----------- --------- ---------
Cash flows used in investing activities
Capital expenditures -- (3,166) (37,217) (256,325) (16,358)
Proceeds from sale of assets -- -- -- -- 92,589
--------- --------- ----------- --------- ---------
Net cash provided (used) by investing
activities -- (3,166) (37,217) (256,325) 76,231
--------- --------- ----------- --------- ---------
Cash flows provided by financing activities
Borrowings under notes payable -- -- 1,842,680 372,132 18,979
Payments on notes payable (95,574) (136,308) (1,056,898) (360,660) (516,997)
Net borrowings (payments) on revolving credit
loans (17,693) 2,211 11,421 91,213 105,899
Principal payments on capital lease
obligations (7,770) (11,866) (464,429) (100,344) (20,119)
Distributions to stockholder (75,407) (96,606) (1,141,239) (129,539) (46,332)
Increase (decrease) in book overdraft (48,892) 97,346 37,224 29,319 (224)
--------- --------- ----------- --------- ---------
Net cash provided (used) by financing
activities (245,336) (145,223) (771,241) (97,879) (458,794)
--------- --------- ----------- --------- ---------
Net change in cash $ -- $ -- $ -- $ -- $ --
========= ========= =========== ========= =========
Supplemental cash flow information:
Cash paid during the year for interest $ 24,716 $ 45,678 $ 226,532 $ 202,665 $ 180,005
========= ========= =========== ========= =========
Supplemental disclosure of noncash investing
and financing activities:
Capital lease obligations assumed $ -- $ 99,831 $ 99,831 $ 611,130 $ --
========= ========= =========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
AEGIS HEALTH SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
Aegis Health Systems, Inc. (the "Company") was incorporated in the State
of Oklahoma on May 19, 1989. The Company's primary business involves
providing lithotripsy services to hospitals, ambulatory surgery centers and
other health care facilities.
2. Summary of Significant Accounting Policies
Property, Plant and Equipment. Property, plant and equipment are recorded at
cost, or in the case of leased assets under capital leases, the present value
of future lease payments. When assets are sold or retired, the costs of the
assets and related accumulated depreciation are removed from the accounts and
any gain or loss is included in operations. Repairs and maintenance are
charged to expense as incurred.
Depreciation and amortization, including amortization of leased assets
under capital leases, are computed using the straight-line method over their
estimated useful lives as follows:
<TABLE>
<CAPTION>
<S> <C>
Buildings 31.5 years
Leasehold improvements 10 years
Equipment 5-7 years
Furniture and office equipment 7 years
Vehicles 5 years
</TABLE>
Organizational Costs. Organizational costs are stated at cost and are
amortized under the straight-line method over their expected useful life of
five years.
Unaudited Interim Periods. The financial information as of March 31, 1995 and
for the three-month periods ended March 31, 1995 and 1994 are unaudited. The
management of the Company believes that all adjustments, which consist only
of normal recurring adjustments, necessary for a fair presentation of the
balance sheet, statements of operations and statements of cash flows at the
date and for the period indicated have been included.
3. Property, Plant and Equipment
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Land and buildings $ 91,891 $ 91,891
Leasehold improvements 3,349 3,349
Equipment 2,102,713 1,595,950
Furniture and office equipment 16,421 16,421
Vehicles 40,045 9,591
Leased assets under capital leases 210,961 675,873
----------- ----------
2,465,380 2,393,075
Accumulated depreciation (1,067,994) (818,748)
----------- ----------
Net property and equipment $ 1,397,386 $1,574,327
=========== ==========
</TABLE>
F-67
<PAGE>
AEGIS HEALTH SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Long-Term Debt
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1994 1993
-------- ----------
<S> <C> <C>
Notes payable to banks, interest rates from 7.95% to 12%, due
January 15, 1995 through October 1, 1998, collateralized by
accounts receivable and certain property and equipment $ 135,258 $ 177,032
Notes payable to finance companies, interest rates from 11% to
21%, due May 1, 1995 through June 1, 1997, collateralized by
equipment 1,609,849 782,293
Revolving line of credit, interest at 9.75%, due October 4,
1995, collateralized by accounts receivable 208,533 197,112
---------- ----------
1,953,640 1,156,437
Less current portion 1,040,415 809,838
---------- ----------
$ 913,225 $ 346,599
========== ==========
</TABLE>
All long-term debt is personally guaranteed by the Company's stockholder.
Aggregate maturities of long-term debt at December 31, 1994 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1995 $1,040,415
1996 757,282
1997 115,078
1998 9,803
1999 10,669
Thereafter 20,393
----------
$1,953,640
==========
</TABLE>
5. Income Taxes
The stockholder of the Company has elected to adopt the provisions of
Subchapter S of the Internal Revenue Code of 1986. As a result, the Company
is not subject to corporate income taxes, except for taxes on capital gains,
if any. Accordingly, no provisions have been made in the accompanying
financial statements for federal and state income taxes since such taxes are
liabilities of the individual stockholder and the amounts thereof depend upon
his tax situation.
The Company's tax returns are subject to examination by federal and state
taxing authorities. In the event of an examination of such tax returns, the
liability of the stockholder could be changed if adjustments in the
distributable income were ultimately sustained by the taxing authorities.
6. Related Party Transactions
During 1994, the Company executed various notes payable to extinguish
certain debt of affiliated entities owned by the Company's stockholder. Prior
to executing the new notes, the Company had made all principal and interest
payments of the affiliates' debt. Principal amounts outstanding under such
notes payable totaled $703,791 at December 31, 1994.
Also, the Company paid certain operating expenses on behalf of these
affiliated entities. Amounts paid by the Company on behalf of the affiliated
entities for principal, interest and operating expenses totaled $1,078,837,
$145,813 and $44,489 for 1994, 1993 and 1992, respectively. Such amounts have
been included in distributions to the Company's stockholder.
F-68
<PAGE>
AEGIS HEALTH SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Leases
Future minimum lease payments under capital and noncancelable operating
leases as of December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Fiscal Year Lease Leases
----------- ------ ---------
<S> <C> <C>
1995 $ 48,214 $35,706
1996 47,802 23,804
1997 45,741 --
1998 45,741 --
1999 24,327 --
Thereafter 1,865 --
-------- -------
Total minimum obligations 213,690 $59,510
=======
Less estimated interest 43,587
--------
Present value of net minimum obligations $170,103
========
</TABLE>
Rent expenses amounted to approximately $36,773, $37,673 and $27,092 in
1994, 1993 and 1992, respectively.
8. Subsequent Event
On April 12, 1995, the Company sold all of the assets used in its business
of providing lithotripsy services to CCC National Lithotripsy, Inc. for
consideration totaling $7,134,815. Pursuant to the Agreement for Purchase and
Sale of Assets, the Company sold certain property, plant and equipment,
including two mobile lithotripter systems and certain accounts receivable and
cash in an amount not to exceed $230,000 and assigned existing service
contracts as well as leases related to one stationary lithotripter system and
two semi-tractors. The purchase price was derived based on the value of the
assets sold and the net revenues generated by the Company's lithotripsy
operations, which excludes certain administrative and other costs included in
the Company's financial statements.
As a result of the sale, the Company paid all of its remaining debt
obligations and presently has no operations.
F-69
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
Oncology & Radiation Associates, P.A.:
We have audited the accompanying balance sheets of Oncology & Radiation
Associates, P.A. (a Florida corporation) as of December 31, 1993 and 1994 and
as of September 12, 1995, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the period from inception
(September 1, 1992) to December 31, 1992 and for each of the two years in the
period ended December 31, 1994 and for the period from January 1, 1995 to
September 12, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Oncology & Radiation
Associates, P.A. as of December 31, 1993 and 1994 and as of September 12,
1995, and the results of its operations and its cash flows for the period
from inception (September 1, 1992) to December 31, 1992 and for each of the
two years in the period ended December 31, 1994 and for the period from
January 1, 1995 to September 12, 1995, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
October 26, 1995.
F-70
<PAGE>
ONCOLOGY & RADIATION ASSOCIATES, P.A.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------
September 12,
1993 1994 1995
--------- --------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 269,438 $ 6,256 $1,140,007
Accounts receivable, net of allowances of
$5,747,352, $6,131,128 and $5,863,246 in 1993,
1994 and 1995, respectively 1,156,251 1,499,834 2,006,767
Prepaid expenses 33,777 73,792 70,732
---------- ---------- ----------
Total current assets 1,459,466 1,579,882 3,217,506
---------- ---------- ----------
Property and equipment, net 183,554 168,477 193,762
---------- ---------- ----------
Covenant not-to-compete, net of accumulated
amortization of $279,206 and $501,779 in 1994 and
1995, respectively 899,630 620,424 397,852
---------- ---------- ----------
Total assets $2,542,650 $2,368,783 $3,809,120
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 650,306 $ 657,114 $1,068,180
Short-term debt 318,750 -- --
Current portion of long-term debt 279,206 299,390 315,480
Due to stockholders 1,103,058 900,259 642,495
Deferred revenue -- -- 105,000
---------- ---------- ----------
Total current liabilities 2,351,320 1,856,763 2,131,155
Long-term debt, net of current portion 620,424 321,034 82,372
---------- ---------- ----------
Total liabilities 2,971,744 2,177,797 2,213,527
---------- ---------- ----------
Commitments and contingencies (Notes 1 and 7)
Stockholders' equity:
Common stock, $.001 par value, 500 shares
authorized, 156 shares issued and outstanding 1 1 1
Retained earnings (deficit) (429,095) 190,985 1,595,592
---------- ---------- ----------
Total stockholders' equity (deficit) (429,094) 190,986 1,595,593
---------- ---------- ----------
Total liabilities and stockholders' equity
(deficit) $2,542,650 $2,368,783 $3,809,120
========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral
part of these balance sheets.
F-71
<PAGE>
ONCOLOGY & RADIATION ASSOCIATES, P.A.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period
Period from From
Inception January 1,
(September 1, Year Ended 1995
1992) to December 31, to
December 31, ----------------------- September 12,
1992 1993 1994 1995
------------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Net patient revenue $2,025,630 $7,847,205 $13,151,687 $10,857,924
Operating costs and expenses:
Salaries and benefits 880,061 4,996,798 7,804,457 5,778,034
Medical supplies expense 197,892 550,800 965,752 1,014,486
Data processing fees 23,192 155,187 406,305 307,928
General and malpractice insurance 86,214 369,522 576,079 442,285
Depreciation and amortization 12,870 80,254 348,170 262,296
Provision for bad debts 71,798 30,000 -- --
Other operating expenses 201,453 1,712,521 1,172,353 833,748
---------- ---------- ----------- -----------
Total operating costs and expenses 1,473,480 7,895,082 11,273,116 8,638,777
---------- ---------- ----------- -----------
Operating income (loss) 552,150 (47,877) 1,878,571 2,219,147
Other income (expense):
Interest income -- 5,212 13,455 12,889
Interest expense -- (3,778) (17,062) (27,429)
---------- ---------- ----------- -----------
Total other income (expense) -- 1,434 (3,607) (14,540)
---------- ---------- ----------- -----------
Net income (loss) $ 552,150 $ (46,443) $ 1,874,964 $ 2,204,607
========== ========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral
part of these statements.
F-72
<PAGE>
ONCOLOGY & RADIATION ASSOCIATES, P.A.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock
----------------------
Retained
Earnings
Shares Amount (Deficit) Total
--------- --------- -------------- ----------------
<S> <C> <C> <C> <C>
Issuance of shares at inception 63 $1 $ -- $ 1
Net income -- -- 552,150 552,150
--- -- ----------- -----------
BALANCE, December 31, 1992 63 1 552,150 552,151
Issuance of shares 93 -- -- --
Net loss -- -- (46,443) (46,443)
Distributions to stockholders -- -- (934,802) (934,802)
--- -- ----------- -----------
BALANCE, December 31, 1993 156 1 (429,095) (429,094)
Net income -- -- 1,874,964 1,874,964
Distributions to stockholders -- -- (1,254,884) (1,254,884)
--- -- ----------- -----------
BALANCE, December 31, 1994 156 1 190,985 190,986
Net income -- -- 2,204,607 2,204,607
Distributions to stockholders -- -- (800,000) (800,000)
--- -- ----------- -----------
BALANCE, September 12, 1995 156 $1 $ 1,595,592 $ 1,595,593
=== == =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral
part of these statements.
F-73
<PAGE>
ONCOLOGY & RADIATION ASSOCIATES, P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
Inception
(September 1, Year Ended Period
1992) to December 31, From January 1,
December 31, ---------------------- 1995
1992 1993 1994 to Sept. 12, 1995
------------- -------- ---------- ------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 552,150 $ (46,443) $ 1,874,964 $ 2,204,607
----------- --------- ----------- -----------
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:
Depreciation and amortization 12,870 80,254 348,170 262,296
Provision for bad debts 71,798 30,000 -- --
Changes in assets and liabilities:
Accounts receivable (1,051,800) (205,229) (343,583) (506,933)
Prepaid expenses -- (33,777) (40,015) 3,060
Accounts payable and accrued
expenses 380,977 325,605 6,808 411,066
Deferred revenue -- -- -- 105,000
----------- --------- ----------- -----------
Total adjustments (586,155) 196,853 (28,620) 274,489
----------- --------- ----------- -----------
Net cash (used in) provided by
operating activities (34,005) 150,410 1,846,344 2,479,096
----------- --------- ----------- -----------
Cash flows from investing activities:
Capital expenditures -- (54,487) (53,887) (65,008)
----------- --------- ----------- -----------
Cash flows from financing activities:
Borrowings on short-term debt -- 318,750 -- --
Payments on short-term debt -- -- (318,750) --
Payments on long-term debt -- -- (279,206) (222,573)
Due to stockholders 322,476 501,096 (202,799) (257,764)
Distributions to stockholders -- (934,802) (1,254,884) (800,000)
----------- --------- ----------- -----------
Net cash provided by (used in)
financing activities 322,476 (114,956) (2,055,639) (1,280,337)
----------- --------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 288,471 (19,033) (263,182) 1,133,751
Cash and cash equivalents, beginning of
period -- 288,471 269,438 6,256
----------- --------- ----------- -----------
Cash and cash equivalents, end of period $ 288,471 $ 269,438 $ 6,256 $ 1,140,007
=========== ========= =========== ===========
Supplemental disclosure of noncash
transactions:
Note payable under covenant not-
to-compete $ -- $ 899,630 $ -- $ --
=========== ========= =========== ===========
Contribution of property and
equipment $ 222,209 $ -- $ -- $ --
=========== ========= =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral
part of these statements.
F-74
<PAGE>
ONCOLOGY & RADIATION ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
December 31, 1993 and 1994 and September 12, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Business
Oncology & Radiation Associates, P.A. (the "Company") is a Florida
corporation organized on September 1, 1992 to provide medical oncology and
radiation services. The Company operates two radiation departments at area
hospitals and eight medical oncology offices throughout Dade County. The
Company has a December 31 year-end.
On September 13, 1995, the Company entered into an asset purchase
agreement and a 20-year management service agreement with Continuum Care
Corporation ("Continuum"), an unaffiliated entity. Continuum will pay the
Company $10,653,000 which includes the purchase of certain assets, as
defined. Terms of the agreement specify $5,250,000 to be paid initially with
the remaining $5,403,000 to be paid semi-annually, incurring interest at 9%,
over the next five years. Continuum will receive the first $2.1 million of
the Company's profits, as defined, and an agreed-upon percentage of the
remaining profit over the term of the management service agreement.
b. Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at the date of purchase to be cash
equivalents. Included in the cash and cash equivalents balances are
interest-bearing deposits of $1,068,536 in 1995. There were no
interest-bearing deposits at December 31, 1993 and 1994.
c. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Property and equipment are depreciated using accelerated methods over the
estimated useful lives of the assets ranging from 5 to 7 years.
d. Accounts Receivable and Revenues
Accounts receivable are primarily amounts due under fee-for-service
contracts from third-party payors such as insurance companies (47%) and
government-sponsored health care programs (35%). These receivables are
presented net of an estimated allowance for contractual adjustments and
uncollectible receivables. Contractual adjustments result from the difference
between the rates for services performed and reimbursement amounts from the
government-sponsored health care programs and insurance companies for such
services.
At September 12, 1995, deferred revenue represents that portion of monthly
managed care fees received in advance and related to the period from
September 13, 1995 through September 30, 1995.
e. Income Taxes
The Company is an S Corporation for tax reporting purposes; as such, its
income is directly taxed to its stockholders and, therefore, no income tax
provision is reflected in the accompanying statements of operations. Had the
Company been a C Corporation during 1992, 1993, 1994 and 1995, the unaudited
pro forma provision for income taxes would be approximately $215,000, $0,
$731,000 and $860,000, respectively.
f. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of the fair value
of certain financial instruments. Cash and cash equivalents, accounts
receivable, prepaid expenses, other assets and accounts payable and accrued
expenses are reflected in the accompanying financial statements at cost which
approximates fair value.
g. Covenant Not-To-Compete
The covenant not-to-compete is amortized on a straight-line basis over the
three-year term of the related agreement (see Note 6).
F-75
<PAGE>
ONCOLOGY & RADIATION ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
September 12,
1993 1994 1995
------- -------- -------------
<S> <C> <C> <C>
Furniture, fixtures and equipment $277,147 $ 319,424 $ 390,060
Leasehold improvements -- 11,502 13,923
-------- --------- ---------
277,147 330,926 403,983
Less: Accumulated depreciation (93,593) (162,449) (210,221)
-------- --------- ---------
$183,554 $ 168,477 $ 193,762
======== ========= =========
</TABLE>
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------
September 12,
1993 1994 1995
------- ------- -------------
<S> <C> <C>
Accounts payable $249,587 $341,484 $ 380,000
Accrued hospital fees 400,719 315,630 279,705
Accrued salaries and benefits -- -- 408,475
-------- -------- ----------
$650,306 $657,114 $1,068,180
======== ======== ==========
</TABLE>
4. SHORT-TERM DEBT
Short-term debt consists of a note payable which bears interest at prime
plus 1%. This note was repaid in 1994.
5. DUE TO STOCKHOLDERS
Due to stockholders consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
September 12,
1993 1994 1995
--------- ------- -------------
<S> <C> <C>
Amounts payable under employment agreements $ 365,391 $532,524 $477,202
Noninterest-bearing advances 185,292 165,292 165,293
Distributions payable 552,375 202,443 --
---------- -------- --------
$1,103,058 $900,259 $642,495
========== ======== ========
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of a note payable for the Company's covenant
not-to-compete, which bears interest at 7% and is payable in monthly
installments of $27,778, through December 30, 1996. Future maturities are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31, Amount
----------------------------- ---------
<S> <C>
1995 $299,390
1996 321,034
--------
$620,424
========
</TABLE>
F-76
<PAGE>
ONCOLOGY & RADIATION ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. COMMITMENTS AND CONTINGENCIES:
a. Employment Agreements
The Company has employment agreements with certain physicians and/or
stockholders. Future minimum payments under such agreements are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, Amount
- ----------------------- -----------
<S> <C>
1995 $1,316,417
1996 734,083
1997 425,000
1998 175,000
1999 175,000
----------
$2,825,500
==========
</TABLE>
b. Insurance
The physicians employed by the Company are required to maintain insurance
coverage for their professional malpractice claims as a condition of
employment. Such insurance provides for coverage to the extent individual
claims do not exceed $1,000,000 per incident and $3,000,000 in the aggregate
per year. Upon termination of employment, each physician is required to
purchase insurance coverage for the remaining outstanding exposure related to
incidents which may be incurred, but reported subsequent to the termination
of their employment. Accordingly, the Company does not provide reserves for
such claims.
c. Operating Leases
The Company leases equipment and office space under operating leases which
expire through 1997. Future annual minimum payments under operating leases
are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, Amount
- ----------------------- ---------
<S> <C>
1995 $244,655
1996 213,769
1997 138,568
--------
$596,992
========
</TABLE>
Rent expense of approximately $2,213, $205,000, $286,000 and $213,000 was
incurred in 1992, 1993, 1994 and 1995, respectively.
d. Legal Matters
An employee of the Company has filed a claim with the Equal Employment
Opportunity Commission. The Company denies liability and is defending the
claim vigorously. The Company and legal counsel are unable to estimate the
amount of any potential loss as a result of this claim, but believes the
loss, if any, would not materially affect the operations of the Company.
F-77
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
Osler Medical, Inc.:
We have audited the accompanying balance sheet of Osler Medical, Inc. (a
Florida corporation) as of September 14, 1995, and the related statements of
operations and retained earnings and cash flows for the period from January
1, 1995 through September 14, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Osler Medical, Inc. as of
September 14, 1995, and the results of its operations and its cash flows for
the period from January 1, 1995 through September 14, 1995 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
October 26, 1995.
F-78
<PAGE>
OSLER MEDICAL, INC.
BALANCE SHEET
SEPTEMBER 14, 1995
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 355,728
Accounts receivable, net of allowances of $505,031 1,515,264
Prepaid expenses 34,736
----------
Total current assets 1,905,728
PROPERTY AND EQUIPMENT, net 1,179,409
OTHER ASSETS 15,621
---------
Total assets $3,100,758
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 814,413
Deferred income taxes 294,500
Current portion of long-term debt 354,297
Due to stockholder 34,175
----------
Total current liabilities 1,497,385
LONG-TERM DEBT, net of current portion 1,316,221
----------
Total liabilities 2,813,606
----------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 7)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 20,000 shares authorized, no shares issued and
outstanding --
Common stock, Class A, $.01 par value, 20,000 shares authorized, 11,000 shares
issued and outstanding 110
Common stock, Class B, $.01 par value, 20,000 shares authorized, 1,000 shares
issued and outstanding 10
Retained earnings 287,032
----------
Total stockholders' equity 287,152
----------
Total liabilities and stockholders' equity $3,100,758
==========
</TABLE>
The accompanying notes to financial statements are an integral
part of this balance sheet.
F-79
<PAGE>
OSLER MEDICAL, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE PERIOD FROM JANUARY 1, 1995 THROUGH SEPTEMBER 14, 1995
<TABLE>
<CAPTION>
<S> <C>
NET PATIENT REVENUE $9,031,159
----------
OPERATING COSTS AND EXPENSES:
Salaries and benefits 5,171,905
Medical supplies 473,530
Rent expense 610,023
Malpractice insurance 514,147
Depreciation expense 226,142
Provision for bad debts 63,634
Other operating expenses 1,084,642
----------
Total operating costs and expenses 8,144,023
----------
Operating income 887,136
INTEREST EXPENSE 78,919
----------
Income before provision for income taxes 808,217
PROVISION FOR INCOME TAXES (315,000)
----------
Net income 493,217
ACCUMULATED DEFICIT, beginning of period (206,185)
----------
RETAINED EARNINGS, end of period $ 287,032
==========
</TABLE>
The accompanying notes to financial statements are an integral
part of this statement.
F-80
<PAGE>
OSLER MEDICAL, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1995 THROUGH SEPTEMBER 14, 1995
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 493,217
-----------
Adjustments to reconcile net income to net cash provided by operating
activities--
Depreciation 226,142
Provision for bad debts 63,634
Provision for deferred income taxes 294,500
Changes in assets and liabilities:
Accounts receivable (213,343)
Prepaid expenses (34,736)
Other assets 28,300
Accounts payable and accrued expenses 539,300
-----------
Total adjustments 903,797
-----------
Net cash provided by operating activities 1,397,014
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (203,659)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long-term debt 2,181,080
Payments on long-term debt (1,669,530)
Due to stockholders (1,626,086)
-----------
Net cash used in financing activities (1,114,536)
-----------
Net increase in cash and cash equivalents 78,819
CASH AND CASH EQUIVALENTS, beginning of period 276,909
-----------
CASH AND CASH EQUIVALENTS, end of period $ 355,728
===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-81
<PAGE>
OSLER MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 14, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Business
Osler Medical, Inc. (the "Company") is a Florida corporation. Prior to
April 1, 1995, the Company operated as a partnership. The partnership was
originally organized in September 1985. The Company provides multi- specialty
medical services and has a December 31 year-end.
On September 15, 1995, the Company sold various assets to Continuum Care
Corporation, an unaffiliated entity, for approximately $3,600,000.
b. Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at the date of purchase to be cash
equivalents. Approximately $185,000 was in excess of Federally insured limits
at September 14, 1995.
c. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Property and equipment are depreciated using accelerated methods over the
estimated useful lives of the assets ranging from 5 to 7 years. Leasehold
improvements are amortized over their estimated lives of 31.5 years using the
straight-line method.
d. Accounts Receivable and Revenues
Accounts receivable are primarily amounts due under fee-for-service
contracts from third-party payors such as insurance companies (27%), patients
(13%) and government-sponsored health care programs (60%). These receivables
are presented net of an estimated allowance for contractual adjustments and
uncollectible receivables. Contractual adjustments result from the difference
between the rates for services performed and reimbursement amounts from the
government-sponsored health care programs and insurance companies for such
services.
e. Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes," which requires that deferred income taxes be recognized for
the tax consequences in future years of differences between the tax basis of
assets and liabilities and their financial reporting basis at rates based on
enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income.
f. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of the fair value
of certain financial instruments. Cash and cash equivalents, accounts
receivable, prepaid expenses, other assets and accounts payable and accrued
expenses are reflected in the accompanying financial statements at cost which
approximates fair value.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at September 14, 1995:
<TABLE>
<CAPTION>
<S> <C>
Furniture, fixtures and equipment $ 2,347,283
Leasehold improvements 531,320
-----------
2,878,603
Less: Accumulated depreciation (1,699,194)
-----------
$ 1,179,409
===========
</TABLE>
F-82
<PAGE>
OSLER MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at
September 14, 1995:
<TABLE>
<CAPTION>
<S> <C>
Accounts payable $176,006
Accrued self-insurance (Note 7) 362,420
Income taxes payable 20,500
Accrued salaries and benefits 255,487
--------
$814,413
========
</TABLE>
4. DUE TO STOCKHOLDER
Due to stockholder represents a note bearing interest at 10.5%, payable in
monthly installments of approximately $7,700 through January 1996.
5. LONG-TERM DEBT
Long-term debt consists of the following at September 14, 1995:
<TABLE>
<CAPTION>
<S> <C>
Note payable in monthly installments of $14,206 through February 1999, bearing
interest at 7.5% and secured by various assets of the Company $ 504,995
Note payable in monthly installments of $20,608 through August 2000, bearing
interest at 8.75% and secured by various assets of the Company 985,275
Capital lease payable in monthly installments of $2,778 through 2000 bearing
interest
at 4% 150,878
Capital lease payable in monthly installments of $525 through 1999, bearing
interest
at 8% 23,570
Capital lease payable in monthly installments of $494 through 1997, bearing
interest at 8% 5,800
----------
$1,670,518
==========
</TABLE>
Future maturities for the twelve months ending September 14 are as
follows:
<TABLE>
<CAPTION>
Capital
Notes Leases
Payable Payable Total
------------ ----------- -----------
<S> <C> <C> <C>
1996 $ 293,363 $ 64,982 $ 358,345
1997 327,600 41,880 369,480
1998 355,488 39,636 395,124
1999 282,661 39,636 322,297
2000 231,158 13,885 245,043
---------- -------- ----------
1,490,270 200,019 1,690,289
Less: Amount representing interest -- (19,771) (19,771)
---------- -------- ----------
$1,490,270 $180,248 $1,670,518
========== ========
Less: Current portion (354,297)
----------
$1,316,221
==========
</TABLE>
F-83
<PAGE>
OSLER MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. INCOME TAXES
The provision for income taxes reflects an estimate of taxes from the date
the Company elected C-Corporation status, April 1, 1995, to September 14,
1995, and consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Current $ 20,500
Deferred 294,500
--------
$315,000
========
Federal 283,000
State 32,000
--------
$315,000
========
</TABLE>
A reconciliation of the tax provision at the statutory rate of 34% to the
effective tax rate is as follows:
<TABLE>
<CAPTION>
<S> <C>
Tax provision at the statutory rate $ 283,000
State income taxes 32,000
---------
$ 315,000
=========
Deferred income taxes consist of the following:
Book/tax differences in recording accounts receivable $ 591,000
Book/tax differences in recording prepaid expenses 13,500
Book/tax differences in recording accounts payable and
accrued expenses (310,000)
---------
$ 294,500
=========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
a. Service Agreements
The Company has service agreements with terms in excess of one year.
Future payments under these agreements are as follows:
<TABLE>
<CAPTION>
Twelve Months
Ending September 14 Total
- -------------------- ----------
<S> <C>
1996 $ 200,197
1997 206,709
1998 212,437
1999 160,073
2000 115,111
Thereafter 140,017
----------
$1,034,544
==========
</TABLE>
b. Operating Leases
The Company leases equipment and office space under operating leases which
expire through 2001. All of these leases of office space are with a
partnership owned by stockholders of the Company. Future annual minimum
payments under operating leases are as follows:
F-84
<PAGE>
OSLER MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Twelve Months Related Unaffiliated
Ending September 14 Party Parties Total
---------------------- ------------ ---------- ----------
<S> <C> <C> <C>
1996 $ 698,434 $136,743 $ 835,177
1997 709,489 174,762 884,251
1998 747,616 138,153 885,769
1999 795,565 105,537 901,102
2000 995,538 40,750 1,036,288
Thereafter 320,819 -- 320,819
---------- -------- ----------
$4,267,461 $595,945 $4,863,406
========== ======== ==========
</TABLE>
Rent expense of approximately $610,000 was incurred for the period from
January 1, 1995 through September 14, 1995. All of this expense was
associated with the related party.
c. Malpractice Insurance
The physicians employed by the Company have insurance coverage for their
professional malpractice claims which is paid for them by the Company. Such
insurance provides for coverage to the extent individual claims do not exceed
$250,000--$2,000,000 per incident and $750,000--$4,000,000 in the aggregate
per year, depending on the physician's coverage.
Upon termination of employment, physicians are not required to purchase
insurance coverage for the remaining outstanding exposure related to
incidents which may be incurred, but reported subsequent to the termination
of their employment. Accordingly, the Company has reserved $362,420 to
provide for this self-insured exposure.
8. BENEFIT PLAN
The Company provides a defined contribution plan under Section 401(k) of
the Internal Revenue Code to substantially all of its employees. Employer
contributions are discretionary and no such contributions were made to the
plan for the period from January 1, 1995 through September 14, 1995.
9. RELATED PARTY
The Company has contracted to provide report reading services to an entity
owned by a stockholder of the Company. The Company received $14,500 for these
services for the period from January 1, 1995 through September 14, 1995.
F-85
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Directors and Stockholders
of Continuum Care Corporation:
We have audited the accompanying balance sheets of Osler Medical (a
Partnership) as of December 31, 1994 and 1993, and the related statements of
income and partners' capital, and cash flows for the years then ended. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Osler Medical as of
December 31, 1994 and 1993, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
Hoyman, Dobson & Company, P.A.
July 27, 1995
F-86
<PAGE>
OSLER MEDICAL
BALANCE SHEETS
December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
--------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 276,909 $ 615,221
Accounts receivable, net of allowance for doubtful accounts of
$469,693 in 1994 and $387,749 in 1993 1,361,555 1,186,418
Loans receivable, related parties 4,000 --
---------- ----------
Total current assets 1,642,464 1,801,639
---------- ----------
Property and equipment, at cost less accumulated depreciation
of $1,473,033 in 1994 and $1,275,019 in 1993 1,201,892 783,094
Deposits 43,921 7,520
---------- ----------
Total assets $2,888,277 $2,592,253
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities:
Line of credit $ 569,801 $ 294,218
Accounts payable and accrued expenses 264,413 622,910
Refunds payable 10,700 4,400
Current portion of obligation under capital lease 5,187 4,710
Current portion of long-term debt 205,125 158,382
Distributions payable to partners 1,565,570 1,525,640
---------- ----------
Total current liabilities 2,620,796 2,610,260
---------- ----------
Long-term liabilities and Obligation under Capital Lease 4,727 9,914
Long-term debt, less current portion 468,939 94,691
---------- ----------
Total long-term liabilities 473,666 104,605
---------- ----------
Total Liabilities 3,094,462 2,714,865
Partners' capital (206,185) (122,612)
---------- ----------
Total liabilities and partners' capital $2,888,277 $2,592,253
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-87
<PAGE>
OSLER MEDICAL
STATEMENTS OF INCOME AND PARTNERS' CAPITAL
December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
---------- ------------
<S> <C> <C>
Revenue:
Gross patient revenue $12,246,700 $10,685,039
Patient write-offs and refunds (3,255,819) (2,740,428)
----------- -----------
Net patient revenue 8,990,881 7,944,611
Salaries, wages and benefits 2,994,383 1,804,151
Professional fees 89,724 63,821
Supplies 701,752 490,088
Utilities 54,952 43,587
Depreciation and amortization. 264,190 156,280
Rent 722,676 696,973
Other 867,527 1,388,282
----------- -----------
Total Operation Expenses 5,695,204 4,643,182
----------- -----------
Operating income 3,295,677 3,301,429
Other income (expense):
Miscellaneous income 1,489 2,967
Interest expense (93,543) (38,776)
Gain (loss) on disposal of assets (3,773) 300
----------- -----------
Net other income (expense) (95,827) (35,509)
----------- -----------
Net Income 3,199,850 3,265,920
Partners' capital--beginning of
year (122,612) (99,310)
Contributed capital -- 300,000
Distributions to the partners (3,283,423) (3,589,222)
----------- -----------
Partners' capital--end of year $ (206,185) $ (122,612)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-88
<PAGE>
OSLER MEDICAL
STATEMENTS OF CASH FLOWS
Years ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
---------- ------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from patients $ 8,822,044 $ 7,779,722
Cash paid to suppliers and employees (5,794,423) (4,195,094)
Interest paid (93,543) (38,776)
----------- -----------
Net cash provided by operating activities 2,934,078 3,545,852
----------- -----------
Cash flows from investing activities:
Capital acquisitions (686,751) (517,209)
Collection of related party loans -- 2,888
Related party loans extended (4,000) --
Deposit paid for capital acquisition (30,000) --
Proceeds from sale of capital assets -- 10,710
----------- -----------
Net cash used by investing activities (720,751) (503,611)
----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt 700,000 80,000
Net borrowings under line of credit 275,583 59,354
Repayment of long-term debt (279,009) (84,673)
Distributions paid to partners (3,243,503) (3,422,627)
Partners' buy-in -- 300,000
Payments on capital lease obligation (4,710) (4,277)
----------- -----------
Net cash used by financing activities (2,551,639) (3,072,223)
----------- -----------
Net decrease in cash and cash equivalents (338,312) (29,982)
Cash and cash equivalents, January 1 615,221 645,203
----------- -----------
Cash and cash equivalents, December 31 $ 276,909 $ 615,221
=========== ===========
Reconciliation of net income to net cash provided by
operating activities:
Net income $ 3,199,850 $ 3,265,920
----------- -----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 264,190 117,505
Loss (gain) on disposal of assets 3,773 (300)
Increase in accounts receivable (175,137) (163,109)
Increase in deposits (6,401) --
Increase (decrease) in accounts payable and accrued
expenses (358,497) 327,576
Increase (decrease) in refunds payable 6,300 (1,740)
----------- -----------
Total adjustments (265,772) 279,932
----------- -----------
Net cash provided by operating activities $ 2,934,078 $ 3,545,852
=========== ===========
Supplemental schedule of noncash investing and financing
activities:
Increase in distributions to partners incurred from cash to
accrual conversion $ (127,854) $ (170,818)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-89
<PAGE>
OSLER MEDICAL
NOTES TO FINANCIAL STATEMENTS
December 31, 1994 and 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business. Osler Medical, organized in September 1985 as a partnership, is a
multi-specialty medical group which utilizes the latest in diagnostic equipment.
Approximately fifty-seven percent of the Partnership's patients are Medicare,
Medicaid or Workers' Compensation recipients.
Basis of Accounting. The Partnership presents its financial statements on
the accrual basis of accounting. Revenues are recognized when they are earned
and expenses are recognized when they are incurred.
Cash Equivalents. For purposes of the statement of cash flows, the
Partnership considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Depreciation Method. The cost of property and equipment is depreciated over
the estimated useful lives of the related assets. Leasehold improvements are
depreciated over the lesser of the term of the related lease or the estimated
useful lives of the assets. Depreciation is computed on the accelerated cost
recovery system and the modified accelerated cost recovery system as
appropriate.
Income Taxes. Osler Medical is not a taxpaying entity for federal income
tax purposes, and thus no income tax expense has been recorded in the
statements. Income from the partnership is taxed to the partners through their
individual returns.
2. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at December 31, 1994
and 1993:
1994
<TABLE>
<CAPTION>
Accumulated Net Book Useful
Cost Depreciation Value Lives
--------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Automobiles $ 11,347 $ 8,079 $ 3,268 5 years
Computer equipment 175,437 55,638 119,799 5 years
Laboratory equipment 2,102 922 1,180 5-7 years
Office equipment 402,848 306,782 96,066 5-7 years
Medical equipment 589,460 511,757 77,703 5-7 years
Diagnostic equipment 945,701 535,691 410,010 5-7 years
Leasehold improvements 523,951 37,608 486,343 5-39 years
Property held under capital lease 24,079 16,556 7,523 5 years
---------- ---------- ----------
Total $2,674,925 $1,473,033 $1,201,892
========== ========== ==========
</TABLE>
F-90
<PAGE>
OSLER MEDICAL
NOTES TO FINANCIAL STATEMENTS--(Continued)
1993
<TABLE>
<CAPTION>
Accumulated Net Book Useful
Cost Depreciation Value Lives
--------- ------------ ------- --------------
<S> <C> <C> <C> <C>
Automobiles $ 11,347 $ 5,900 $ 5,447 5 years
Computer equipment 43,732 23,647 20,085 5 years
Laboratory equipment 20,131 18,308 1,823 5-7 years
Office equipment 347,626 262,779 84,847 5-7 years
Medical equipment 544,015 499,136 44,879 5-7 years
Diagnostic equipment 848,087 429,902 418,185 5-7 years
Leasehold improvements 219,096 21,798 197,298 5-39 years
Property held under capital lease 24,079 13,549 10,530 5 years
---------- ---------- -------- ----------
Total $2,058,113 $1,275,019 $783,094
========== ========== ========
</TABLE>
Depreciation expense charged to operations in 1994 and 1993 was $264,190
and $117,505, respectively.
The property held under capital lease is diagnostic equipment.
3. LINE OF CREDIT
At December 31, 1994, Osler had three lines of credit available with a
bank totaling $800,000. As of December 31, 1994 there were outstanding draws
against the lines of $569,801, $369,801 of this amount is due on demand and
$200,000 is due March 31, 1995. Interest is payable monthly on all three
lines of credit at the bank prime rate (8.5% at December 31, 1994) plus 2.0%.
The lines of credit are collateralized by all accounts receivable, machinery,
furniture, fixtures, equipment and leasehold improvements of Osler Medical.
The partners of Osler Medical have personally guaranteed the debts.
Osler Medical had a $300,000 line of credit with a bank at December 31,
1993. As of December 31, 1993 there were outstanding draws against the line
of $294,218 which were due March 31, 1994. Interest is payable monthly at the
bank prime rate (6.0% at December 31, 1994). The line of credit is
collateralized by all accounts receivable, machinery, furniture, fixtures,
equipment and leasehold improvements of Osler Medical. The partners of Osler
Medical have personally guaranteed the debt.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following is a summary of accounts payable and accrued expenses at
December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Accounts payable $137,476 $448,619
Accrued wages 44,191 56,007
Contract labor 17,942 91,059
Accrued vacation 29,690 --
Other accrued liabilities 35,114 27,225
-------- --------
$264,413 $622,910
======== ========
</TABLE>
Employees of Osler Medical are entitled to paid personal leave days,
depending on job classifications, length of service and other factors. Until
December 31, 1994, the Company did not have an accounting software system
which tracked accrued personal days. It is, therefore, impracticable for
Osler Medical to estimate the amount of the liability at December 31, 1993,
and accordingly, no liability has been recorded. The amount of compensated
absences at December 31, 1994 can be reasonably determined and the liability
has been recorded in accounts payable and accrued expenses in the
accompanying financial statement.
F-91
<PAGE>
OSLER MEDICAL
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. LONG TERM DEBT
Long term debt outstanding as of December 31, 1994 and 1993 consists of
the following:
<TABLE>
<CAPTION>
1994 1993
-------- ----------
<S> <C> <C>
Note payable to bank in monthly installments of $14,026 including
interest at 7.5%, beginning February 1994; secured by machinery,
furniture and equipment $ 579,373 $ --
Note payable to bank; principal and interest due in full on January
8, 1994; interest accrues at .5% over the bank prime rate (6.0% at
December 31, 1993); secured by machinery, furniture and equipment -- 80,000
Note payable to P.A. of partner in monthly installments of $7,738,
including interest at 8.75%, beginning February 1991,
uncollateralized 94,691 173,073
--------- ---------
Total 674,064 253,073
Less current portion (205,125) (158,382)
--------- ---------
Total long-term debt $ 468,939 $ 94,691
========= =========
</TABLE>
Following are maturities of long-term debt for each of the next five
years:
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------ ---------
<S> <C>
1995 $205,125
1996 146,089
1997 149,163
1998 160,743
1999 12,944
--------
$674,064
========
</TABLE>
Total interest expense for the year ended December 31, 1994 and 1993 was
$93,543 and $38,776, respectively.
6. OPERATING LEASE
Osler Medical is the lessee of office space and equipment under various
leases expiring in various years through 2002. Some of the leases are with
related parties, see Note 11.
Minimum future rental payments under non-cancelable operating leases
having remaining terms in excess of one year as of December 31, 1994 are as
follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------- ----------
<S> <C>
1995 $ 843,814
1996 870,673
1997 885,561
1998 887,655
1999 904,252
Subsequent to 1999 1,087,255
----------
Total minimum future rental payments $5,479,210
==========
</TABLE>
Osler Medical has several leases for office space and equipment with a
partnership of two of the partners of Osler Medical. These leases have
scheduled rent increases calculated as follows: the base rent is increased
annually
F-92
<PAGE>
OSLER MEDICAL
NOTES TO FINANCIAL STATEMENTS--(Continued)
from the previous years rent by the greater of six percent or any increase in
the consumer price index (CPI). However, that percent is never to exceed
twelve percent or be greater than two percent above the published CPI.
Rent expense paid for operating leases for the year ended December 31,
1994 and 1993 was $771,173 and $731,278, respectively.
7. CAPITAL LEASE
Osler Medical is the lessee of diagnostic equipment under a capital lease
expiring in 1996. The asset and liability under this capital lease are
recorded at the lower of the present value of the minimum leases payments or
the fair market value of the asset. The asset is depreciated over the lesser
of the lease term or its estimated productive life. Depreciation of this
asset is included in depreciation expense for 1994 and 1993.
Minimum future lease payments under the capital lease as of December 31,
1994 are as follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------- -------
<S> <C>
1995 $ 5,920
1996 4,940
-------
Total minimum lease payments 10,860
Less: amount representing interest 946
-------
Present value of net minimum lease payments. $ 9,914
=======
</TABLE>
Total interest expense on this capital lease was $1,210 and $1,643 for the
years ended December 31, 1994 and 1993, respectively.
8. MAINTENANCE AND SERVICE AGREEMENTS
The Partnership has entered into several equipment maintenance agreements
and one service agreement with a related party having various expiration
dates through the year 2000.
Minimum future payments under maintenance and service agreements having
remaining terms in excess of one year as of December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------- ----------
<S> <C>
1995 $ 222,687
1996 204,035
1997 207,810
1998 214,342
1999 137,728
Subsequent to 1999 214,957
----------
Total minimum future rental payments $1,201,559
==========
</TABLE>
Maintenance and service costs charged to operations under these agreements
for the years ended December 31, 1994 and 1993 were $125,322 and $117,209,
respectively.
9. EMPLOYEE RETIREMENT PLAN
The Partnership sponsors a profit-sharing plan which allows substantially
all full-time employees to defer compensation under Section 401 (k) of the
Internal Revenue Code and the employer to electively contribute to the plan.
Employer contributions to the plan are made at the discretion of the Board of
Directors.
There were no employer contributions made to the plan for the years ended
December 31, 1994 and 1993.
F-93
<PAGE>
OSLER MEDICAL
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. INCOME TAXES
The partnership is not subject to income tax. Income is taxed directly to
its partners. The partnership reported income of approximately $3,083,700 and
$3,100,500 for income tax purposes, for the years ended December 31, 1994 and
December 31, 1993, respectively. The difference between taxable income and
the income reflected in the financial statements results primarily from
timing differences in reporting revenues and expenses for financial and tax
purposes. Such timing differences result from the use of the accrual basis
method of accounting for financial reporting and cash basis method for tax
reporting.
11. RELATED PARTY TRANSACTIONS
Osler Medical has several operating leases with a partnership of two of
the partners in Osler. The leases are for office space and equipment. The
leases for office space are for ten years beginning on dates from January
1990, to December 1990. Rental expense for the office space was $658,475 and
$636,407 for the years ended December 31, 1994 and 1993, respectively. Future
minimum lease payments under these leases are included in Note 6. The
equipment lease with the partnership ended in April 1993. At the end of the
lease, the lessor offered and Osler chose to exercise an option to purchase
the leased equipment for $1. This bargain purchase was not part of the
original operating lease agreement. Rental expense under this lease for the
year ended December 31, 1993 was $56,000.
Osler Medical also entered into a management agreement with the
partnership described above. The management agreement is for a term of ten
years beginning on December 1990. Management expense under this agreement was
$64,201 and $60,566 for the years ended December 31, 1994 and 1993,
respectively. Minimum future payments under this agreement are included in
Note 8.
Osler Medical has a note payable to a P.A. owned by one of the partners of
Osler Medical. The outstanding balance on this note at December 31, 1994 and
1993 was $94,691 and $173,073, respectively. See Note 5 for the terms of the
note.
Osler Medical has contracted to provide report reading services to a
Company owned by one of the partners of Osler Medical. The Company paid Osler
$33,946 and $61,986 for reading services for the years ended December 31,
1994 and December 31, 1993, respectively.
12. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Partnership to
concentrations of credit risk consist primarily of temporary cash
investments. The Partnership places its temporary cash investments with a
financial institution. The amount of credit exposure in excess of
federally-insured limits at December 31, 1994 and December 31, 1993 was
$260,596 and $163,397, respectively.
13. COMMITMENTS AND CONTINGENCIES
A. Self Insurance
The Partnership has an agreement whereby it is self insuring the health
care of its employees and covered dependents up to $10,000 per year per
employee and covered dependents. Health care expenses of covered individuals
in excess of $10,000 per year are paid out of insurance purchased by the
Partnership. Administration of the self insurance is handled by an insurance
company. Funds advanced for claims are recorded as current assets and charged
to expenses as claims are paid. The annual aggregate stop loss under this
insurance plan was approximately $293,000 and $138,000 for the years ended
December 31, 1994 and 1993, respectively. The annual aggregate liability
calculated by the insurance company for the insurance coverage for years
ended December 31, 1994 and 1993 was $148,950 and $137,976, respectively. The
total amount of claims and premiums paid by the Partnership under this policy
for the years ended December 31, 1994 and 1993 were $207,337 and $189,122,
respectively. The Partnership has accrued $35,114 and $27,225 at December 31,
1994 and 1993 for claims incurred but not reported.
F-94
<PAGE>
OSLER MEDICAL
NOTES TO FINANCIAL STATEMENTS--(Continued)
B. Professional Employment Agreement
Osler Medical entered into an employment agreement with a physician on
July 14, 1994. Under this agreement, the partnership will pay the physician
$10,000 as an incentive to exercise a partnership purchase option. If the
option is not exercised the incentive money must be repaid to Osler Medical.
In addition, the agreement guarantees the physician a monthly gross salary of
$10,000 for the first six months of employment. Starting the seventh month of
employment, the physician will be paid based upon a compensation formula in
the agreement. The agreement ends July 9, 1997 unless terminated prior to
that date with 120 days written notice and mutual agreement of the parties.
14. SUBSEQUENT EVENTS
A. Line of Credit
The Partnership entered into a line of credit for $198,603 in April 1995.
The funds were borrowed to pay off an existing line of credit due on May 31,
1995. This line of credit is due June 30, 1995. Interest is payable monthly
at the bank prime rate plus 2.0%. The line is secured by all accounts
receivable, machinery, equipment, furniture, fixtures and leasehold
improvements of Osler Medical and is cross-collateralized. The line is
personally guaranteed by the partners of Osler Medical.
The Partnership entered into a line of credit on June 21, 1995 for
$500,000. The amount paid off an existing $300,000 line of credit. The line
is due on demand. Interest is payable monthly at the bank prime rate plus
2.0%. The line is secured by all accounts receivable, machinery, equipment,
furniture, fixtures and leasehold improvements of Osler Medical and is
cross-collateralized. The line is personally guaranteed by the partners of
Osler Medical.
On July 12, 1995, the Partnership consolidated its three existing lines of
credit ($300,000, $198,603 and $500,000) into a note of $998,603. The note is
payable in monthly installments of $20,608, including interest at 8.75% per
annum, beginning August 17, 1995. The note is collateralized by all accounts
receivable, machinery, equipment, furniture, fixtures, and leasehold
improvements of Osler Medical and is cross-collateralized. The note is
personally guaranteed by the partners of Osler Medical. The following
maturities of this note payable are as follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------ --------
<S> <C>
1995 $ 83,217
1996 199,721
1997 199,721
1998 199,721
1999 116,502
--------
Subsequent to 1999 $998,603
========
</TABLE>
B. Capital Lease
The Partnership signed a five year capital lease agreement on March 17,
1995. The lease is for diagnostic equipment valued at $150,878. The following
is the minimum future lease payments for this capital lease are as follows:
F-95
<PAGE>
OSLER MEDICAL
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------- --------
<S> <C>
1995 $ 24,999
1996 33,332
1997 33,332
1998 33,332
1999 33,332
Subsequent to 1999 8,333
--------
Total minimum lease payments 166,659
Less: amount representing interest 15,781
--------
Present value of minimum lease payments $150,878
========
</TABLE>
C. Change in Tax Status
Effective January 1, 1995, Osler Medical changed its tax status from a
partnership to a C-Corporation.
D. Sale of the Partnership
Osler Medical is in the process of negotiating an agreement to sell all of
the assets, properties and businesses used in the practice and owned by the
Partnership to an unrelated party for approximately $3,600,000. The assets
which are not included in the sale are goodwill, patient lists and medical
records, cash or cash equivalents on hand and on deposit in banks and the
personal assets of the physicians.
F-96
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C.
BALANCE SHEET
As of April 14, 1995
(unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets
Cash $ 276,651
Accounts receivable 1,242,634
Inventory 113,723
Prepaid expenses 14,201
----------
Total current assets 1,647,209
Net property and equipment 438,863
Other assets
Deferred taxes 58,123
Investment in subsidiary 27,477
----------
Total other assets 85,600
Total assets $2,171,672
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable 12,282
Accrued expenses and other liabilities 61,636
Note payable--line of credit --
Note payable--stockholders 440,300
Current portion of long term debt 155,992
Deferred income taxes 183,793
----------
Total current liabilities 854,003
Long term debt less current portion 219,899
----------
Total liabilities 1,073,902
Stockholders' equity
Common stock--Class A $.05 par value, 4,800 shares authorized; 4,601 shares
issued 230
Common stock--Class B $.05 par value, 5,200 shares authorized, 1,600 shares
issued 80
Additional paid in capital 61,815
Retained earnings 1,035,645
----------
Total stockholders' equity 1,097,770
Total liabilities and stockholders' equity $2,171,672
==========
</TABLE>
F-97
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
For the period January 1, 1995--April 14, 1995
(unaudited)
<TABLE>
<CAPTION>
<S> <C>
Revenue
Drug sales, net $1,418,839
Less cost of sales 503,994
----------
Gross profit from drug sales 914,845
Patient revenues, net 1,159,674
----------
Gross profit from drug sales and patient revenues 2,074,519
Other revenues 25,570
----------
Total revenues 2,100,089
----------
Operating expenses
Physician compensation 597,044
Clinic salaries, wages and benefits 484,134
Clinic rents 72,897
Clinic supplies 84,166
Other clinic costs 194,064
Depreciation 19,529
Interest 9,732
----------
Total operating expenses 1,461,566
----------
Net income before income taxes 638,523
Income taxes 20,902
-----------
Net income 617,621
Retained earnings, beginning 418,024
----------
Retained earnings, ending $1,035,645
==========
</TABLE>
F-98
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C.
STATEMENT OF CASH FLOWS
For the period January 1, 1995--April 14, 1995
(unaudited)
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities
Net income $ 617,621
Adjustments to reconcile net income to net cash (used) in operating
activities
Depreciation 19,529
Equity in income of subsidiary 105
Changes in operating assets and liabilities
Accounts receivable 9,831
Inventory 49,907
Prepaid expenses 12,312
Accounts payable (131,148)
Accrued expenses and other liabilities (957,590)
---------
Net cash (used) in operating activities (379,433)
---------
Cash flows from investing activities
Purchase of property and equipment (209)
---------
Net cash used by investing activities (209)
---------
Cash flows from financing activities
Payment of notes payable--line of credit (237,000)
Payments of long-term debt (41,563)
Proceeds from notes payable--stockholders. 199,500
---------
Net cash (used) by financing activities (79,063)
---------
Net decrease in cash (458,705)
Cash, beginning of year 735,356
---------
Cash, end of year $ 276,651
=========
Supplemental disclosures:
Cash paid during the year for interest $ 9,732
=========
Cash paid during the year for income taxes $ 20,902
=========
</TABLE>
F-99
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Georgia Oncology-Hematology Clinic, P.C.
Atlanta, Georgia
We have audited the accompanying consolidated balance sheet of Georgia
Oncology-Hematology Clinic, P.C. and Subsidiary as of December 31, 1994 and
the related consolidated statements of operations and retained earnings, and
cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Georgia
Oncology-Hematology Clinic, P.C. and Subsidiary as of December 31, 1994, and
the results of their operations and their cash flows for the year then ended
in conformity with generally accepted accounting principles.
BABUSH, NEIMAN, KORNMAN & JOHNSON
June 26, 1995
F-100
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1994
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets
Cash and cash equivalents $ 747,970
Accounts receivable, less allowance for doubtful accounts of $339,006 1,297,413
Inventory 163,630
Prepaid expenses 26,709
----------
Total current assets 2,235,722
Net property and equipment 458,183
----------
Other assets
Deferred taxes 58,123
----------
Total assets $2,752,028
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 173,606
Accrued expenses and other liabilities 1,019,226
Note payable--line of credit 237,000
Note payable--stockholders 240,800
Current portion of long-term debt 155,255
Deferred income taxes 183,793
----------
Total current liabilities 2,009,680
Long-term debt, less current portion 262,199
----------
Total liabilities 2,271,879
----------
Stockholders' equity
Common stock--Class A, $.05 par value, 4,800 shares authorized; 4,601 shares
issued 230
Common stock--Class B, $.05 par value, 5,200 shares authorized; 1,600 shares
issued 80
Additional paid-in capital 61,815
Retained earnings 418,024
----------
Total stockholders' equity 480,149
----------
Total liabilities and stockholders' equity $2,752,028
==========
</TABLE>
See notes to consolidated financial statements
F-101
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
For the year ended December 31, 1994
<TABLE>
<CAPTION>
<S> <C>
Revenues
Drug sales net $4,502,513
Less cost of sales 2,519,182
----------
Gross profit from drug sales 1,983,331
Patient revenues, net 4,099,952
----------
Gross profit from drug sales and patient revenues 6,083,283
Other revenues 13,897
----------
Total revenues 6,097,180
----------
Operating Expenses
Physician compensation 2,659,297
Clinic salaries, wages and benefits 1,671,337
Clinic rents 216,415
Clinic supplies 287,752
Other clinic costs 1,048,524
Depreciation 115,792
Interest 52,984
----------
Total operating expenses 6,052,101
----------
Income before income taxes 45,079
Income taxes 11,393
----------
Net income 33,686
Retained earnings, beginning 387,838
Distributions (3,500)
----------
Retained earnings, ending $ 418,024
==========
</TABLE>
See notes to consolidated financial statements
F-102
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended December 31, 1994
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities
Net income $ 33,686
Adjustments to reconcile net income to net cash provided by operating
activities
Loss on disposal of property and equipment 745
Depreciation 115,792
Provision for bad debts 179,424
Deferred income taxes (5,816)
Changes in operating assets and liabilities
Accounts receivable (495,521)
Inventory (85,421)
Prepaid expenses (3,227)
Accounts payable 51,615
Accrued expenses and other liabilities 686,925
---------
Net cash provided by operating activities 478,202
---------
Cash flows from investing activities
Proceeds from disposal of property and equipment 100
Purchase of property and equipment (192,003)
Other assets 6,000
---------
Net cash used by investing activities (185,903)
---------
Cash flows from financing activities
Proceeds from notes payable--line of credit 137,000
Payments of long-term debt (140,999)
Proceeds from long-term debt 170,576
Proceeds from notes payable--stockholders 210,000
Distributions (3,500)
---------
Net cash provided by financing activities 373,077
---------
Net increase in cash 665,376
Cash, beginning of year 82,594
---------
Cash, end of year $ 747,970
=========
Supplemental disclosures
Cash paid during the year for interest $ 52,984
=========
Cash paid during the year for income taxes $ 4,397
=========
Purchase of property and equipment financed by notes payable $ 116,877
=========
</TABLE>
See notes to consolidated financial statements
F-103
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C. AND SUBSIDIARY
Notes to Consolidated Financial Statements
A. Accounting Policies
Description of Business. Georgia Oncology-Hematology Clinic, P.C. (the
"Corporation") was incorporated in 1975 under the laws of Georgia. The
Corporation was formed to operate medical oncology facilities in Atlanta,
Georgia. The Corporation offers a comprehensive range of medical oncology
services at three facilities in the Atlanta area.
Property and Equipment. Property and equipment are stated at cost.
Depreciation of property and equipment is generally calculated over the
estimated useful lives of the assets using accelerated methods. Depreciation of
leasehold improvements is calculated on a straight line basis over the term of
the lease. Routine maintenance and repairs are charged to expenses as incurred,
while costs of betterments and renewals are capitalized.
Income Taxes. The Corporation is taxable under provisions of the Internal
Revenue Code. The Corporation recognizes deferred income tax on all significant
timing differences between financial and income tax reporting (see Note H).
Net Revenues. Net revenues are reported at the estimated realizable amounts
from patients, third-party payors, and others for services rendered. Revenue
under certain third-party payor agreements is subject to audit and retroactive
adjustments. Provisions for estimated third-party payor settlements and
adjustments are estimated in the period the related services are rendered and
adjusted in future periods as final settlements are determined. During the year
ended December 31, 1994, approximately 41% of net revenue was received under the
Medicare program and 2% under state reimbursement programs. The Medicare program
and state reimbursement programs pay physician services based on fee schedules
which are determined by the related government agency. The Corporation has
negotiated agreements with managed care organizations to provide physician
services based on fee schedules. No individual managed care organization is
material to the Corporation.
Inventory. Inventory is stated at the lower of first-in first-out, cost or
market.
Principles of Consolidation. The consolidated financial statements include
the accounts of Georgia Oncology- Hematology Clinic, P.C. and its wholly owned
subsidiary, Georgia Oncology-Hematology Services, Inc. All material intercompany
transactions have been eliminated.
B. Net Property and Equipment
Major classifications of property and equipment and their respective
depreciable lives are summarized below:
<TABLE>
<CAPTION>
Depreciable
Lives Total
---------- ----------
<S> <C> <C>
Furniture and equipment 5-7 years $ 693,950
Leasehold improvements 3-13 years 537,894
---------- ----------
1,231,844
Less accumulated depreciation and amortization 773,661
----------
Total $ 458,183
==========
</TABLE>
C. Notes Payable
During 1994, the Corporation obtained a line of credit from a bank in the
amount of $250,000. The line of credit matures on May 31, 1995. Interest is
charged at the prime rate plus 0.5%. The accounts receivable of the
Corporation are pledged as collateral against the line of credit. The amount
outstanding under the line of credit at December 31, 1994 was $237,000 with
available credit of $13,000.
F-104
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C. AND SUBSIDIARY
Notes to Consolidated Financial Statements--(Continued)
At various times, the Corporation has obtained notes from its
stockholders. The notes are unsecured and are payable on demand. Interest is
charged at the prime rate. Amounts outstanding under the notes at December
31, 1994 were $240,800. All notes from stockholders and related accrued
interest were repaid in May, 1995.
The prime rate at December 31, 1994 was 8.5%.
D. Long-Term Debt
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Note payable to a bank, due in monthly installments of $8,253 plus interest at the
prime rate plus 0.5% through November 1997 collateralized by furniture, fixtures
and equipment $ 288,845
Note payable to a bank, due in monthly installments of $1,500 plus interest at 7%
through February 1997, collateralized by computer equipment 38,699
Note payable to a corporation, due in monthly installments of $2,440 including
principal and interest at 7% through March 1997 collateralized by furniture,
fixtures and equipment 60,800
Note payable to a corporation, due in monthly installments of $1,168 including
principal and interest at 7% through March 1997 collateralized by leasehold
improvements 29,110
---------
Total long-term debt 417,454
Less current maturities (155,255)
---------
Long-term debt, less current maturities $ 262,199
=========
</TABLE>
At December 31, 1994 scheduled aggregate long-term debt maturities are as
follows:
<TABLE>
<CAPTION>
Year Ending December 31, Amount
------------------------ ---------
<S> <C>
1995 $155,255
1996 158,019
1997 104,180
--------
$417,454
========
</TABLE>
E. Operating Leases
Leases that do not meet the criteria for capitalization are classified as
operating leases with related rentals charged to operations as incurred.
Under agreements classified as operating leases, the Company leases
facilities for its three locations and certain equipment. The lease for one
of the locations, with an aggregate monthly expense of $8,287 expires on
January 31, 1996. This lease has been renewed for five years.
The lease for the second location, with an aggregate monthly expense of
$4,700 plus direct costs expires on May 31, 1997. The Company has an option
to renew this lease for five years. The lease for the third location, with an
aggregate monthly expense of $1,608 in 1994, expires on November 30, 1996.
The Company has an option to renew this lease for five years with rent
increasing by 5% each year.
F-105
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C. AND SUBSIDIARY
Notes to Consolidated Financial Statements--(Continued)
The following is a schedule by year of future minimum lease payments under
operating leases as of December 31, 1994.
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1995 $182,008
1996 181,044
1997 125,214
1998 99,444
1999 99,444
Thereafter 107,731
--------
Total $794,885
========
</TABLE>
Total rent expense for the year ended December 31, 1994 was $216,415.
F. Employee Benefit Plan
The Corporation has a qualified defined contribution 401(k) Profit Sharing
Plan covering substantially all employees. Employee contributions in the form
of pretax salary deferrals are discretionary and are determined based upon a
percentage of each employee's compensation, as defined. Employer
contributions are determined at the discretion of the Company. Contributions
to the plan totalled $176,521 for the year ended December 31, 1994.
G. Contingencies
The Corporation maintains general liability and malpractice insurance
providing the Corporation with coverage of $5 million per incident and $7
million in aggregate. As of December 31, 1994, there were no asserted
malpractice claims against the Corporation; accordingly, no amounts for
potential losses have been accrued in the accompanying financial statements.
In addition, the Corporation has not accrued for a loss of unreported
incidents or for losses in excess of insurance coverage, as the amount, if
any, cannot be reasonably estimated and the profitability of an adverse
outcome cannot be determined at this time. It is the opinion of management
that the ultimate resolution of any unasserted claims will not have a
material adverse effect on the financial position or operating results of the
Corporation.
H. Income Taxes
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Corporation's deferred tax liabilities and assets as of
December 31, 1994 were as follows:
<TABLE>
<CAPTION>
December 31,
1994
--------
<S> <C>
Deferred current tax liabilities:
Cash to accrual adjustments $342,461
Deferred current tax assets:
Cash to accrual adjustments 158,668
--------
Net deferred current tax liabilities $183,793
========
Deferred long-term tax assets:
Depreciable and amortizable assets $ 58,123
========
</TABLE>
F-106
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C. AND SUBSIDIARY
Notes to Consolidated Financial Statements--(Continued)
The provision for income taxes for the year ended December 31, 1994 is as
follows:
<TABLE>
<CAPTION>
<S> <C>
Current:
Federal $14,520
State 2,689
-------
17,209
-------
Deferred:
Federal (5,468)
State (348)
-------
(5,816)
-------
Net income tax expense $11,393
=======
</TABLE>
I. Related Party Transactions
The Corporation has loans from its stockholders amounting to $240,800 at
December 31, 1994 (see Note C).
J. Subsequent Events
On April 17, 1995, PhyChoice, Inc. acquired the operating assets of the
Corporation. Simultaneous with the acquisition, the Corporation entered into
a 10-year management services agreement with PhyChoice, Inc. The management
services agreement became effective April 17, 1995. The Company has entered
into merger discussions with Cancer Specialists of Georgia, P.C.
K. Deposits in Excess of Federally Insured Limits
The Company has cash deposits with a financial institution which fluctuate
in excess of federally insured limits. If this financial institution were not
to honor its contractual obligation to the Company then the Company could
incur losses. Management is of the opinion that there is no risk because of
the financial strength of the financial institution. At December 31, 1994,
the Company had cash deposits of $1,007,183 with the financial institution
resulting in $907,183 being at risk.
F-107
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
COMBINED BALANCE SHEET
JULY 25, 1995
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 236,422
Accounts receivable, less allowances for adjustments and doubtful accounts 692,839
Prepaid expenses 111,107
----------
Total current assets 1,040,368
----------
PROPERTY AND EQUIPMENT, less accumulated depreciation of $124,952 158,518
----------
PROPERTY UNDER CAPITAL LEASES, less accumulated amortization of $29,578 37,879
----------
OTHER ASSETS
Organization costs, less accumulated amortization of $246 574
Other assets 10,000
----------
Total other assets 10,574
----------
Total assets $1,247,339
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 108,160
Other accrued expenses and liabilities 67,944
Due to related party 6,400
Current portion of obligations under capital leases 7,731
Deferred income taxes--current 142,630
Accrued income taxes 25,000
----------
Total current liabilities 357,865
----------
OTHER LIABILITIES
Obligations under capital leases 36,875
Deferred income taxes 12,870
----------
Total other liabilities 49,745
----------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value; 75 and 600 shares authorized, issued and
outstanding 675
Additional paid-in capital 24,243
Retained earnings 814,811
----------
Total stockholders' equity 839,729
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,247,339
==========
</TABLE>
F-108
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE PERIOD JANUARY 1, 1995 THROUGH JULY 25, 1995
<TABLE>
<CAPTION>
<S> <C>
REVENUE
Net patient service revenue $2,403,860
Other income 22,969
----------
Total revenue 2,426,829
----------
OPERATING EXPENSES
Cost of affiliated physician services 579,881
Salaries, wages and benefits 537,283
Rents and leases 112,645
Supplies 628,048
Other operating costs 157,567
Depreciation and amortization 24,767
Net interest expense 18,411
----------
Net operating expenses 2,058,602
----------
NET INCOME (LOSS) BEFORE INCOME TAXES 368,227
INCOME TAX
Current 25,000
Deferred 16,730
----------
41,730
----------
NET INCOME 326,497
RETAINED EARNINGS--BEGINNING OF
PERIOD 488,314
----------
RETAINED EARNINGS--END OF PERIOD $ 814,811
==========
</TABLE>
F-109
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
COMBINED STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 1995 THROUGH JULY 25, 1995
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 326,497
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 24,767
Deferred income taxes 16,730
Changes in operating assets and liabilities:
Accounts receivable, net (177,143)
Prepaid expenses (25,164)
Deposits 1,064
Accounts payable 18,475
Other accrued expenses and liabilities (19,495)
Due to related party (1,100)
Accrued income taxes 25,000
---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 189,631
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (16,335)
---------
NET CASH (USED) BY INVESTING ACTIVITIES (16,335)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of capital lease obligations (7,689)
---------
NET CASH (USED) BY FINANCING ACTIVITIES (7,689)
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 165,607
CASH AND CASH EQUIVALENTS--BEGINNING OF PERIOD 70,815
---------
CASH AND CASH EQUIVALENTS--END OF PERIOD $ 236,422
=========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 18,411
=========
Purchase of equipment with proceeds of capital lease
obligations $ 19,220
=========
</TABLE>
F-110
<PAGE>
WEIL, AKMAN, BAYLIN & COLEMAN, P.A.
Certified Public Accountants
201 West Padonia Road, Suite 600
Timonium, Maryland 21093-2186
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Oncology-Hematology Associates, P.A. and
Oncology-Hematology Infusion Therapy, Inc.
We have audited the accompanying combined balance sheets of
Oncology-Hematology Associates, P.A. and Oncology-Hematology Infusion
Therapy, Inc. (1994 only) as of December 31, 1994 and 1993, and the related
combined statements of operations and retained earnings and cash flows for
the years then ended of Oncology- Hematology Associates, P.A. and for the
period March 7, 1994 (date of inception) through December 31, 1994 of
Oncology-Hematology Infusion Therapy, Inc. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
combined financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of
Oncology-Hematology Associates, P.A. and Oncology-Hematology Infusion
Therapy, Inc. (1994 only) at December 31, 1994 and 1993, and the results of
its operations and its cash flows for the years then ended and from March 7,
1994 (date of inception) through December 31, 1994 of Oncology-Hematology
Infusion Therapy, Inc. in conformity with generally accepted accounting
principles.
WEIL, AKMAN, BAYLIN & COLEMAN, P.A.
Timonium, Maryland
August 4, 1995
F-111
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
COMBINED BALANCE SHEETS
DECEMBER 31,
<TABLE>
<CAPTION>
1994 1995
----------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 70,815 $194,081
Accounts receivable, less allowances for adjustments and
doubtful accounts 515,696 465,201
Prepaid expenses 85,943 76,574
Deposits 1,064 --
-------- --------
Total current assets 673,518 735,856
-------- --------
PROPERTY AND EQUIPMENT, less accumulated depreciation of
$107,911 in 1994 and $87,710 in 1993 159,224 67,930
-------- --------
PROPERTY UNDER CAPITAL LEASES, less accumulated
amortization of $21,948 in 1994 and $13,213 in 1993 26,289 17,942
-------- --------
OTHER ASSETS
Organization costs, less accumulated amortization of $150 670 --
Other assets 10,000 10,000
-------- --------
Total other assets 10,670 10,000
-------- --------
Total Assets $869,701 $831,728
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 89,685 $ 22,169
Other accrued expenses and liabilities 87,439 74,985
Due to related party 7,500 --
Current portion of obligations under capital leases 9,844 6,448
Deferred income taxes--current 125,570 155,700
-------- --------
Total current liabilities 320,038 259,302
-------- --------
OTHER LIABILITIES
Obligations under capital leases 23,231 17,496
Deferred income taxes 13,200 9,600
-------- --------
Total other liabilities 36,431 27,096
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value; 75 (1993 and 1994) and
600 shares (1994 only) authorized, issued and
outstanding 675 75
Additional paid-in capital 24,243 18,843
Retained earnings 488,314 526,512
-------- --------
Total stockholders' equity 513,232 545,330
-------- --------
Total liabilities and stockholders' equity $869,701 $831,728
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-112
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, (ONCOLOGY-HEMATOLOGY
ASSOCIATES, P.A.) FOR THE PERIOD MARCH 7, 1994 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1994 (ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.)
<TABLE>
<CAPTION>
1994 1993
--------- -----------
<S> <C> <C>
REVENUE
Net patient service revenue $3,738,339 $3,397,458
Other income 10,211 44,196
---------- ----------
Total revenue 3,748,550 3,441,654
---------- ----------
OPERATING EXPENSES
Cost of affiliated physician services 1,401,663 1,479,424
Salaries, wages and benefits 864,690 731,714
Rents and leases 157,269 129,663
Supplies 1,038,571 982,007
Other operating costs 206,600 147,010
Depreciation and amortization 29,086 20,487
Net interest expense 19,299 12,028
---------- ----------
Net operating expenses 3,717,178 3,502,333
---------- ----------
NET INCOME (LOSS) BEFORE INCOME TAXES 31,372 (60,679)
INCOME TAX (BENEFIT) (26,530) (61,316)
NET INCOME 57,902 637
RETAINED EARNINGS AT BEGINNING OF
YEAR 526,412 525,775
DISTRIBUTIONS TO STOCKHOLDERS (96,000) --
---------- ----------
RETAINED EARNINGS AT END OF YEAR $ 488,314 $ 526,412
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-113
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, (ONCOLOGY-HEMATOLOGY
ASSOCIATES, P.A.) FOR THE PERIOD MARCH 7, 1994 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1994 (ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.)
<TABLE>
<CAPTION>
1994 1993
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 57,902 637
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 29,086 20,487
Deferred income taxes (26,530) (61,340)
Changes in operating assets and liabilities:
Accounts receivable, net (50,495) 193,404
Prepaid expenses (9,369) (5,030)
Other assets -- (10,000)
Deposits (1,064) --
Accounts payable 67,516 (9,437)
Other accrued expenses and liabilities 12,454 22,428
Due to related party 7,500 --
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 87,000 151,149
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (111,495) (18,688)
Organizational costs (820) --
--------- --------
NET CASH (USED) BY INVESTING ACTIVITIES (112,315) (18,688)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of capital lease obligations (7,951) (3,872)
Issuance of capital stock 600 --
Additional paid in capital 5,400 --
Dividends paid (96,000) --
--------- --------
NET CASH (USED) BY FINANCING ACTIVITIES (97,951) (3,872)
--------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (123,266) 128,589
CASH AND CASH EQUIVALENTS--BEGINNING OF YEAR 194,081 65,492
--------- --------
CASH AND CASH EQUIVALENTS--END OF YEAR $ 70,815 $194,081
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 19,299 $ 12,028
========= ========
Cash paid during the year for income taxes $ -- $ 24
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-114
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Oncology-Hematology Associates, P.A. and Oncology-Hematology Infusion
Therapy were incorporated on January 1, 1978 and February 4, 1994,
respectively, under the laws of the State of Maryland. The Companies were
formed to operate oncology and hematology facilities in Clinton and
Greenbelt, Maryland, dedicated to providing comprehensive cancer treatment
and diagnosis.
Basis of Combination
The combined financial statements for the 1994 year include the financial
statements of Oncology-Hematology Associates, P.A. and Oncology-Hematology
Infusion Therapy, Inc. which are related through common ownership and
management. All intercompany transactions and accounts have been eliminated
in combination.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
Property and Equipment
Property and equipment are carried at cost and are depreciated on the
straight-line method over the following lives:
<TABLE>
<CAPTION>
Life (Years)
-------------
<S> <C>
Leasehold improvements 15
Furniture and fixtures 7
Equipment 7
Data processing equipment 5
</TABLE>
Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes. Deferred taxes relate primarily to the differences between reporting
the financial statements on the accrual basis and the income tax return on
the cash basis. The deferred tax assets and liabilities represent the future
tax return consequences of these differences, which will either be taxable or
deductible when the assets or liabilities are recovered or settled.
The stockholders of Oncology-Hematology Infusion Therapy, Inc. have
consented to the Company's election to come within the provisions of Section
1372(A) of the Internal Revenue Code which provides that income of the
Corporation will be taxed directly to its stockholders; thus no provision for
Federal income taxes has been provided.
Net Revenue
Net revenue is reported at the estimated realizable amounts from patients,
third-party payors and others for services rendered. Revenue under certain
third-party payor agreements is subject to audit and retroactive adjustments.
Provisions for estimated third-party payor settlements and adjustments are
estimated in the period the related services are rendered and adjusted in
future periods as final settlements are determined. The Medicare and Medicaid
programs pay physician services based on fee schedules which are determined
by the related government agency. The Company has negotiated agreements with
managed care organizations to provide physician services based on fee
schedules. No individual managed care organization is material to the
Company.
Cost of Affiliated Physician Services
Cost of affiliated physician services represents salaries, bonuses and
selected benefits paid to the affiliated physicians. Physicians compensation
generally is determined based on the excess of collections over expenses
prior to physician compensation.
F-115
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE B. CASH
Oncology-Hematology Associates P.A. maintains cash balances at a local
bank. Cash accounts at banks are insured by the FDIC for up to $100,000.
Amounts in excess of insured limits were approximately $10,200 at December
31, 1994 and $35,528 at December 31, 1993.
NOTE C. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 31,:
<TABLE>
<CAPTION>
1994 1993
-------- ----------
<S> <C> <C>
Accounts Receivable $ 830,179 $ 824,971
Less: Adjustments for third party payor (294,483) (344,770)
Allowance for doubtful accounts (20,000) (15,000)
--------- ---------
Accounts receivable--net $ 515,696 $ 465,201
========= =========
</TABLE>
NOTE D. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31,:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Leasehold improvements $ 103,009 $ 43,885
Furniture, fixtures and equipment 82,023 51,454
Data processing equipment 82,103 60,301
--------- --------
267,135 155,640
Less: accumulated depreciation (107,911) (87,710)
--------- --------
Property and equipment--net $ 159,224 $ 67,930
========= ========
</TABLE>
The statement of income includes depreciation expense of $20,201 for the
year ended December 31, 1994 and $14,256 for the year ended December 31,
1993.
NOTE E. PROPERTY UNDER CAPITAL LEASES
All property under capital leases have been leased from a partnership
owned exclusively by the Company's shareholders. Property under capital
leases consisted of the following at December 31,:
<TABLE>
<CAPTION>
1994 1993
------- ---------
<S> <C> <C>
Medical equipment $ 29,942 $ 15,510
Computer equipment 18,295 15,645
-------- --------
48,237 31,155
Less: accumulated depreciation (21,948) (13,213)
-------- --------
Property under capital
leases--net $ 26,289 $ 17,942
======== ========
</TABLE>
The statement of income includes depreciation expense of $8,735 for the
year ended December 31, 1994 and $6,231 for the year ended December 31,
1993.
F-116
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE F. OBLIGATIONS UNDER CAPITAL LEASES
The Company leases equipment under capital leases. The leases require
monthly payments which vary from $25 to $1,200 and mature through October
1999. Under the terms of the leases, the Company has a bargain purchase
option at the end of each lease.
Future minimum lease payments under the capital leases at December 31,
1994 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1995 $29,550
1996 21,300
1997 20,300
1998 15,300
1999 and thereafter 3,950
-------
Total minimum lease payments 90,400
Less: amount representing interest 57,325
-------
Value of minimum lease payments 33,075
Current portion of lease obligations 9,844
-------
Long-term portion of lease obligations $23,231
=======
</TABLE>
The statement of income includes interest expense of $19,299 for the year
ended December 31, 1994 and $12,028 for the year ended December 31, 1993.
NOTE G. INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting
for income taxes to the liability method required by Financial Accounting
Standards Board (FASB) Statement No. 109, "Accounting for Income Taxes."
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and
assets as of December 31, were as follows:
<TABLE>
<CAPTION>
1994 1993
------- --------
<S> <C> <C>
Current deferred tax liabilities:
Cash to accrual adjustments $147,350 $177,200
Current deferred tax assets:
Cash to accrual adjustments (21,780) (21,500)
-------- --------
Net deferred current tax liabilities $125,570 $155,700
======== ========
Long-term deferred tax liabilities:
Cash to accrual adjustments $ 19,400 $ 17,800
Long-term deferred tax assets:
Depreciable and amortizable assets (6,200) (8,200)
-------- --------
Net deferred long-term liabilities $ 13,200 9,600
======== ========
</TABLE>
F-117
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
The provision for income taxes consisted of the following at December 31,:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Current income tax
(benefit)
Federal $ -- $ --
State -- 24
Deferred taxes (26,530) (61,340)
-------- --------
$(26,530) $(61,316)
======== ========
</TABLE>
NOTE H. RELATED PARTY TRANSACTIONS
The Company paid building and equipment rentals of $24,720 in 1993 and
$54,720 in 1994 per lease agreements to a partnership formed 100% by the
Company's shareholders for its Greenbelt office. The Company also paid
rent of $93,530 in 1993 and $26,700 in 1994 for its Clinton office space
from a partnership in which the Company's shareholders own 11.28%. Payroll
and other expenses were paid by the Company for the operation of a jointly
owned medical lab proportionate to the number of tests done specifically
for the Company. At December 31, 1994, $2,060 was payable by the Company
as a result of the related party transactions. There were no amounts due
at December 31, 1993.
NOTE I. COMMITMENTS
The Company leases its principal place of business and equipment from a
partnership partially owned by its shareholders. The minimum annual
rentals total $92,990 plus property taxes. The leases expire in October
1995 and November 1995.
The Company leases its secondary place of business and equipment from a
partnership owned by the Company's shareholders. The minimum annual
rentals total $54,720 plus insurance and taxes. The leases expire in
September 1996 and December 1999.
Minimum annual rental payments are as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
------------
<S> <C>
1995 $114,260
1996 58,540
1997 30,000
1998 30,000
1999 and thereafter 30,000
--------
$262,800
========
</TABLE>
Minimum annual rentals to be received from noncancelable subleases are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1995 $ 8,400
1996 3,500
-------
$11,900
=======
</TABLE>
F-118
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE J. CONTINGENCIES
In addition to the general liability and malpractice insurance carried by
the individual physicians, the Company maintains general liability and
malpractice insurance providing the Company with coverage of $1,000,000
per incident and $3,000,000 in aggregate per doctor. As of December 31,
1994, there were no asserted malpractice claims against the Company,
accordingly, no amounts for potential losses have been accrued in the
accompanying financial statements. In addition, the Company has not
accrued a loss for unreported incidents or for losses in excess of
insurance coverage, as the amount, if any, cannot be reasonably estimated
and the probability of an adverse outcome cannot be determined at this
time. It is the opinion of management that the ultimate resolution of any
unasserted claims will not have a material adverse effect on the financial
position or operating results of the Company.
NOTE K. SUBSEQUENT EVENT
In July 1995, Phychoice, Inc. acquired the operating assets of the
Company. Along with the acquisitions, the Company entered into a 15 year
management services agreement with Phychoice, Inc. The management services
agreement became effective on July 6, 1995.
NOTE L. PROFIT SHARING PLAN
The Company has a profit sharing plan and money purchase pension plan. All
employees 25 or older with three years of service during which 1,000 hours
of service are completed are eligible to participate. Contributions to the
plan are made annually as determined, within plan limits, by the Company.
The Company contribution for the year ended December 31, 1994, was $33,854
and $113,907 for the profit sharing plan and money purchase pension plan,
respectively. For the year ended December 31, 1993, $36,877 and $104,946
was contributed for the profit sharing and money purchase pension plans,
respectively.
F-119
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of Cancer Specialists of Georgia, P.C.:
We have audited the accompanying balance sheet of Cancer Specialists of
Georgia, P.C. as of July 31, 1995 and the related statements of operations
and retained earnings (accumulated deficit) and cash flows for the nine month
period then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cancer Specialists of
Georgia, P.C. as of July 31, 1995 and the results of its operations and its
cash flows for the nine month period then ended in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 9, 1996
F-120
<PAGE>
CANCER SPECIALISTS OF GEORGIA, P.C.
BALANCE SHEET
JULY 31, 1995
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 8,833
Accounts receivable, less allowance for doubtful accounts of $501,337 1,692,965
Inventory 114,940
Prepaid expenses and other 17,584
----------
Total current assets 1,834,322
----------
NET PROPERTY AND EQUIPMENT 224,822
----------
OTHER ASSETS:
Deferred income taxes 38,622
Goodwill and other intangibles, net of accumulated amortization of $17,583 143,417
----------
Total other assets 182,039
----------
TOTAL ASSETS $2,241,183
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank overdraft $ 97,820
Accounts payable 1,074,029
Accrued expenses and other liabilities 660,123
Notes payable 758,974
Current portion of long-term debt 112,428
Deferred income taxes 35,185
----------
Total current liabilities 2,738,559
----------
TOTAL LIABILITIES 2,738,559
----------
Commitments and contingencies (Notes E and G) --
STOCKHOLDERS' DEFICIT:
Common stock, no par value; 200,000 shares authorized;
1,500 shares issued and outstanding 1,500
Accumulated deficit (498,876)
----------
Stockholders' deficit (497,376)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $2,241,183
==========
</TABLE>
See notes to financial statements.
F-121
<PAGE>
CANCER SPECIALISTS OF GEORGIA, P.C.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
For the nine month period ended July 31, 1995
<TABLE>
<CAPTION>
<S> <C>
REVENUES
Drug sales, net $ 5,104,710
Less cost of sales 2,647,762
-----------
Gross profit from drug sales 2,456,948
Patient revenues, net 4,504,518
-----------
6,961,466
OTHER REVENUES 12,949
-----------
TOTAL REVENUES 6,974,415
-----------
OPERATING EXPENSES
Physician compensation 1,912,862
Clinic salaries, wages and benefits. 1,500,365
Management fees--related party (Note I). 1,713,609
Clinic and equipment rents--related party (Note I) 605,494
Clinic and equipment rents 220,725
Clinic supplies 384,277
Other clinic costs 951,438
Provision for bad debts 501,337
Provision for write-off of intangible asset 86,644
Depreciation and amortization 95,835
Interest 39,675
-----------
TOTAL OPERATING EXPENSES 8,012,261
-----------
NET LOSS BEFORE INCOME TAX BENEFIT (1,037,846)
INCOME TAX BENEFIT 231,006
-----------
NET LOSS (806,840)
RETAINED EARNINGS, BEGINNING 307,964
-----------
ACCUMULATED DEFICIT, ENDING $ (498,876)
===========
</TABLE>
See notes to financial statements.
F-122
<PAGE>
CANCER SPECIALISTS OF GEORGIA, P.C.
STATEMENT OF CASH FLOWS
For the nine month period ended July 31, 1995
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(806,840)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 95,835
Provision for bad debts 501,337
Provision for write-off of intangible asset 86,644
Deferred income taxes (231,006)
Amortization of discount on debt 8,991
Changes in operating assets and liabilities:
Accounts receivable (528,462)
Inventory 6,719
Prepaid expenses and other 5,916
Accounts payable (29,829)
Accrued expenses and other liabilities. 343,932
---------
NET CASH USED BY OPERATING ACTIVITIES (546,763)
---------
CASH FLOWS FOR INVESTING ACTIVITIES
Purchase of property and equipment (1,295)
---------
NET CASH USED BY INVESTING ACTIVITIES (1,295)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in bank overdraft 97,820
Proceeds from notes payable 448,974
Payments of long-term debt (287,015)
---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 259,779
---------
NET DECREASE IN CASH (288,279)
CASH, BEGINNING OF PERIOD 297,112
---------
CASH, END OF PERIOD $ 8,833
=========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for interest $ 29,651
=========
</TABLE>
See notes to financial statements.
F-123
<PAGE>
CANCER SPECIALISTS OF GEORGIA, P.C.
NOTES TO FINANCIAL STATEMENTS
A. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS--Cancer Specialists of Georgia, P.C. (the
"Corporation") was incorporated in 1988 under the laws of Georgia. The
Corporation's fiscal year is the calendar year. These financial statements are
for the nine month period ended July 31, 1995. The Corporation was formed to
operate medical oncology facilities in Atlanta, Georgia. The Corporation offers
a comprehensive range of medical oncology services at eleven facilities in the
Atlanta area.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation of property and equipment is generally calculated over the
estimated useful lives of the assets using accelerated methods. Depreciation of
leasehold improvements is calculated on a straight line basis over the term of
the lease. Routine maintenance and repairs are charged to expense as incurred,
while costs of betterments and renewals are capitalized.
INCOME TAXES--The Corporation is taxable under provisions of the Internal
Revenue Code. The Corporation recognizes deferred income tax on all significant
timing differences between financial and income tax reporting. (See Note H)
NET REVENUES--Net revenues are reported at the estimated realizable amounts
from patient, third-party payors, and others for services rendered. Revenue
under certain third-party payor agreements is subject to audit and retroactive
adjustments. Provisions for estimated third-party payor settlements and
adjustments are estimated in the period the related services are rendered and
adjusted in future periods as final settlements are determined. During the nine
month period ended July 31, 1995, approximately 40% of net revenue was received
under the Medicare program and 1% under state reimbursement programs. The
Medicare program and state reimbursement programs pay physician services based
on fee schedules which are determined by the related government agency. The
Corporation has negotiated agreements with managed care organizations to provide
physician services based on fee schedules. No individual managed care
organization is material to the Corporation.
INVENTORY--Inventory is stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
GOODWILL AND OTHER INTANGIBLES--The excess of purchase price over the fair
value of assets acquired in a business combination accounted for by the purchase
method (goodwill) and the value assigned to non- competition agreements are
amortized on a straight-line basis over a 15-year period. The Corporation
periodically assesses the recoverability of goodwill when there are indications
of potential goodwill impairment based on estimates of undiscounted future cash
flows for the applicable business acquired. The amount of impairment is
calculated by comparing anticipated discounted future income from acquired
businesses with the carrying value of the related goodwill. In performing this
analysis, management considers such factors as current results, trends and
future prospects, in addition to other economic factors.
The Company is required to implement Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" in 1996. As the Company currently
continually evaluates the realizability of its long-lived assets, including
goodwill and intangibles, adoption of the statement is not anticipated to
have a material effect on the Company's financial statements at the date of
adoption.
F-124
<PAGE>
CANCER SPECIALISTS OF GEORGIA, P.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
B. NET PROPERTY AND EQUIPMENT
Major classifications of property and equipment and their respective
depreciable lives are summarized below:
<TABLE>
<CAPTION>
Depreciable
Lives Total
--------- ---------
<S> <C> <C>
Furniture and equipment 7 years $ 25,295
Leasehold improvements 7-13 years 338,602
---------
363,897
Less accumulated depreciation and amortization (139,075)
---------
Total $ 224,822
=========
</TABLE>
C. NOTES PAYABLE
The Corporation has a line of credit from a bank in the amount $250,000.
The line of credit matures on August 30, 1995. Interest is payable monthly at
the prime rate minus 0.5%. The amount outstanding under the line of credit at
July 31, 1995 was $210,130 with available credit of $39,870. The line of
credit is collateralized by accounts receivable of the Corporation.
At July 31, 1995, the Corporation had a note payable to a bank in the
amount of $248,844. The note was payable on July 31, 1995 and was repaid
subsequent to this date without penalty. Interest was payable monthly at the
prime rate minus 0.5%. The note payable was collateralized by accounts
receivable of the Corporation.
At July 31, 1995, the Corporation had a note payable to a bank in the
amount of $150,000. The note was payable on July 28, 1995 and was repaid
subsequent to this date without penalty. Interest was payable monthly at the
prime rate minus 0.5%. The note payable was collateralized by accounts
receivable of the Corporation.
At July 31, 1995, the Corporation had notes payable to two of its
stockholders for a total amount of $150,000. The notes are payable in
quarterly installments beginning on August 1, 1995 and mature May 1, 1996.
Interest is payable quarterly at the prime rate plus 0.5%. The notes payable
are collateralized by accounts receivable of the Corporation.
The prime rate at July 31, 1995 was 8.75%.
D. LONG-TERM DEBT
The long-term debt is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Note payable to a bank, due in monthly installments of $11,165 including principal and
interest at 6.75% through August 1995, collateralized by personal guaranties from
the stockholders $ 33,701
Non-interest bearing note issued in connection with acquisition of assets of a
practice, due in monthly installments of $16,082 through December 1995, face amount
of $192,978 (less unamortized discount of $1,681 based on imputed interest rate of
8.5%) 78,727
---------
Total long-term debt 112,428
Less current maturities (112,428)
---------
Long-term debt, less current maturities $ --
=========
</TABLE>
F-125
<PAGE>
CANCER SPECIALISTS OF GEORGIA, P.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
E. OPERATING LEASES
All leases are classified as operating leases with related rentals charged
to operations as incurred. Under agreements classified as operating leases,
the Company leases facilities for its eleven locations and most of its
medical and business equipment.
The following is a schedule by year of future minimum lease payments under
operating leases as of July 31, 1995.
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ----------
<S> <C>
1995 (for the period August 1--December 31, 1995) $ 616,395
1996 1,040,494
1997 994,113
1998 736,506
1999 620,403
Thereafter 1,426,841
----------
Total $5,434,752
==========
</TABLE>
Total rent expense for the nine months ended July 31, 1995 was $826,219.
F. EMPLOYEE BENEFIT PLAN
During 1995 the Corporation had a qualified defined contribution plan
covering substantially all employees. Contributions were determined each year
at the employers' discretion. There were no contributions for the nine month
period ended July 31, 1995.
G. CONTINGENCIES
The Corporation maintains general liability and malpractice insurance
providing the Corporation with coverage of $1 million per incident and $3
million in aggregate. As of July 31, 1995, there were no asserted malpractice
claims against the Corporation; accordingly, no amounts for potential losses
have been accrued in the accompanying financial statements.
H. INCOME TAXES
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Corporation's deferred tax liabilities and assets as of
July 31, 1995 were as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred Current Tax Liabilities
Cash to accrual adjustments $720,175
Deferred Current Tax Assets
Cash to accrual adjustments 684,990
--------
Net Deferred Current Tax Liabilities $ 35,185
========
Deferred Long-Term Tax Assets
Depreciable and amortizable assets $ 38,622
========
</TABLE>
F-126
<PAGE>
CANCER SPECIALISTS OF GEORGIA, P.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The provision for income taxes for the nine month period ended July 31,
1995 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Current
Federal $ --
State --
---------
--
---------
Deferred
Federal (217,146)
State (13,860)
---------
(231,006)
---------
NET INCOME TAX BENEFIT $(231,006)
=========
</TABLE>
I. RELATED PARTY TRANSACTIONS
The Corporation has a management agreement with a company whose
stockholders include two of the stockholders of the Corporation and a family
member of one of the stockholders of the Corporation. The management company
provides practice management and billing and collections services. The
management agreement provides for a fee equivalent to 16% of adjusted net
collections. Expenses related to the management agreement were $1,713,609 for
the nine month period ended July 31, 1995.
The Corporation has office leases for two of its clinics with a
partnership that is owned by three stockholders of the Corporation and a
family member of a stockholder. Rental expense of $231,750 was incurred on
these leases during the nine month period ended July 31, 1995.
The Corporation leases certain medical and business equipment from a
partnership that is owned by a stockholder of the Corporation and certain
family members of the stockholder. Rental expense of $285,418 was incurred on
this lease during the nine month period ended July 31, 1995.
The Corporation leases certain medical and business equipment from a
partnership that is owned by a stockholder of the Corporation and certain
family members of the stockholder. Rental Expense of $46,017 was incurred on
this lease during the nine month period ended July 31, 1995.
The Corporation leases certain medical and business equipment from a
corporation that is owned by a stockholder of the Corporation and certain
family members of the stockholder. Rental expense of $42,309 was incurred on
this lease during the nine month period ended July 31, 1995.
J. PROVISION FOR WRITE-OFF OF INTANGIBLE ASSET
In July 1995, the Corporation recorded a provision of $86,644 for the
write-off of the remaining unamortized balance of a noncompetition agreement.
The individual with whom the agreement had been made is now deceased.
Therefore, the Corporation determined that the noncompetition agreement no
longer had any value.
K. SUBSEQUENT EVENTS
On August 15, 1995, PhyChoice, Inc. acquired the operating assets of the
Corporation. Also, on August 15, 1995, the Corporation merged with Georgia
Oncology-Hematology Clinic, P.C. to form Georgia Cancer Specialists, P.C.
Simultaneous with the acquisition of assets and the merger, the newly formed
Georgia Cancer Specialists, P.C. entered into a 10-year management services
agreement with PhyChoice, Inc. The management services agreement became
effective August 15, 1995.
F-127
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Mobile Lithotripter of Indiana Partners
We have audited the balance sheets of Mobile Lithotripter of Indiana
Partners as of September 30, 1995 and 1994, and the related statements of
income, partners' capital and cash flows for the years then ended and for the
period from February 12, 1993 (date of formation) to September 30, 1993.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mobile Lithotripter of
Indiana Partners at September 30, 1995 and 1994, and the results of its
operations and its cash flows for the years then ended and for the period
from February 12, 1993 to September 30, 1993 in conformity with generally
accepted accounting principles.
KATZ, SAPPER & MILLER, LLP
Certified Public Accountants
Indianapolis, Indiana
October 25, 1995
F-128
<PAGE>
MOBILE LITHOTRIPTER OF INDIANA PARTNERS
BALANCE SHEETS
September 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents--Note 6 $ 442,187 $ 383,971
Accounts receivable--hospitals 265,381 260,672
Prepaid expenses 5,512 20,023
---------- ----------
Total Current Assets 713,080 664,666
---------- ----------
EQUIPMENT
Medical and office equipment. 950,984 520,664
Less: Accumulated amortization 250,577 171,772
---------- ----------
Total Equipment 700,407 348,892
---------- ----------
OTHER ASSETS
Goodwill, net of amortization of $1,277,378 in 1995
and $798,362 in 1994 5,907,875 6,386,892
---------- ----------
TOTAL ASSETS $7,321,362 $7,400,450
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 52,746 $ 28,807
Current maturities of long-term debt--Note 2 173,124
---------- ----------
Total Current Liabilities 52,746 201,931
LONG-TERM DEBT
Equipment lease obligation--Note 2 144,106
---------- ----------
Total liabilities 52,746 346,037
PARTNERS' CAPITAL--Note 6 7,268,616 7,054,413
---------- ----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $7,321,362 $7,400,450
========== ==========
</TABLE>
See Accompanying Notes to Financial Statements.
F-129
<PAGE>
MOBILE LITHOTRIPTER OF INDIANA PARTNERS
STATEMENTS OF INCOME
Years Ended September 30, 1995 and 1994 and
Period from February 12, 1993 to September 30, 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- -----------
<S> <C> <C> <C>
REVENUE
Rental income--Note 3 $2,399,731 $1,990,894 $1,467,614
Supply income 159,650 132,680 110,980
Interest income 18,272 8,933 2,408
---------- ---------- ----------
Total Revenue 2,577,653 2,132,507 1,581,002
---------- ---------- ----------
COSTS AND EXPENSES
Operating--Notes 4 and 5 481,481 429,651 313,008
Amortization and depreciation 587,027 582,809 387,325
General and administrative--Note 4 217,899 206,500 158,249
Interest expense 27,517 48,236 41,889
---------- ---------- ----------
Total Costs and Expenses 1,313,924 1,267,196 900,471
---------- ---------- ----------
NET INCOME $1,263,729 $ 865,311 $ 680,531
========== ========== ==========
</TABLE>
See Accompanying Notes to Financial Statements.
F-130
<PAGE>
MOBILE LITHOTRIPTER OF INDIANA PARTNERS
STATEMENTS OF PARTNERS' CAPITAL
Years Ended September 30, 1995 and 1994 and
Period from February 12, 1993 to September 30, 1993
<TABLE>
<CAPTION>
<S> <C>
Cash contributed by T2 Medical, Inc. $ 4,507,153
Assets and goodwill contributed to Mobile Lithotripter of Indiana Limited, an
Indiana Limited Partnership 7,131,571
Special distribution to Mobile Lithotripter of Indiana Limited, an Indiana Limited
Partnership (4,507,153)
-----------
NET INITIAL PARTNERS' CAPITAL 7,131,571
Net income for the period 680,531
Distributions to partners (150,000)
-----------
PARTNERS' CAPITAL AT SEPTEMBER 30, 1993 7,662,102
Net income for the year 865,311
Distributions to partners (1,473,000)
-----------
PARTNERS' CAPITAL AT SEPTEMBER 30, 1994 7,054,413
Net income for the year 1,263,729
Distributions to partners (1,049,526)
-----------
PARTNERS' CAPITAL AT SEPTEMBER 30, 1995--Note 6 $ 7,268,616
===========
</TABLE>
See Accompanying Notes to Financial Statements.
F-131
<PAGE>
MOBILE LITHOTRIPTER OF INDIANA PARTNERS
STATEMENTS OF CASH FLOWS
Years Ended September 30, 1995 and 1994 and
Period from February 12, 1993 to September 30, 1995
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,263,729 $ 865,311 $ 680,531
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of equipment 108,010 103,792 67,980
Amortization of goodwill 479,017 479,017 319,345
Loss on abandonment of equipment 5,260
(Increase) decrease in certain current assets:
Accounts receivable--hospitals (4,709) (2,765) (257,907)
Prepaid expenses 14,511 7,253 (27,276)
Increase (decrease) in certain current
liabilities:
Accounts payable and accrued expenses 23,939 (8,275) 37,082
----------- ----------- -----------
Net cash provided by operating activities 1,889,757 1,444,333 819,755
----------- ----------- -----------
INVESTING ACTIVITIES
Acquisitions of equipment (464,785) (10,784)
----------- -----------
Net cash (used) by investing activities. (464,785) (10,784)
----------- -----------
FINANCING ACTIVITIES
Principal payments on long-term debt (317,230) (153,639) (92,694)
Cash contributed by T2 Medical, Inc 4,507,153
Special distribution to Mobile Lithotripter of
Indiana Limited, an Indiana Limited Partnership (4,507,153)
Distributions to partners (1,049,526) (1,473,000) (150,000)
----------- ----------- -----------
Net cash (used) by financing activities (1,366,756) (1,626,639) (242,694)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 58,216 (193,090) 577,061
CASH AND EQUIVALENTS
Beginning of Period 383,971 577,061
----------- ----------- -----------
End of Period $ 442,187 $ 383,971 $ 577,061
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest expense $ 27,517 $ 48,236 $ 41,889
Noncash investing and financing activities:
Assets and liabilities contributed by Mobile
Lithotripter of Indiana Limited, an Indiana
Limited Partnership:
Goodwill $ 7,185,254
Medical equipment under capital lease 509,880
Lease obligation on medical equipment (563,563)
Trade-in value of tractor 24,038
</TABLE>
See Accompanying Notes to Financial Statements.
F-132
<PAGE>
MOBILE LITHOTRIPTER OF INDIANA PARTNERS
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mobile Lithotripter of Indiana Partners (the Partnership) was formed as an
Indiana general partnership on February 12, 1993 by T2 Medical, Inc. (T2), a
publicly-held company, and Mobile Lithotripter of Indiana Limited, an Indiana
Limited Partnership (MLIL). Unless earlier terminated in accordance with the
specific provisions of the Partnership Agreement, the Partnership terminates
on February 11, 2012. T2 was designated as the "Managing Partner" of the
Partnership.
The Partnership operates a mobile extracorporeal renal shockwave
lithotripter and rents it to various hospitals located in Indiana. Most of
the stockholders of MLI, Inc., general partner of MLIL, are urologists who
are members of the medical staffs of the hospitals which rent the
lithotripter. The Partnership commenced operations in February 1993.
Upon formation of the Partnership, T2 contributed cash of $4,507,153 and
MLIL contributed substantially all of its assets and business, other than its
accounts receivable and cash on hand, to the Partnership. The Partnership
also assumed MLIL's liabilities and hospital rental agreements. The value of
the net assets contributed to the Partnership by MLIL was $7,131,571,
including goodwill of $7,185,254 attributable to the business and the
relationships with the hospitals previously served by MLIL. Immediately after
the formation of the Partnership, MLIL received a special distribution from
the Partnership of the $4,507,153 of cash which had been contributed by T2.
The acquisition of the MLIL assets was accounted for by the purchase method,
with T2 acquiring 63.2% of the Partnership. Thus, MLIL retained a 36.8%
interest in the Partnership.
On December 31, 1994, MLIL sold its remaining 36.8% interest in the
Partnership to CCC-Indiana Lithotripsy, Inc., a wholly-owned subsidiary of
Phymatrix Corp., for $2,638,085. T2 merged into Coram Healthcare Corporation
in July 1994.
Cash and Equivalents: For purposes of the statement of cash flows, cash
equivalents include bank time deposits with original maturities of three
months or less. The Partnership maintains its cash in bank deposit accounts
which, at times, may exceed federally insured limits. The Partnership has not
experienced any losses in such accounts.
Equipment: Medical equipment under capital lease was recorded at its fair
value on the date it was contributed to the Partnership and is being
amortized over five years using the straight-line method. Equipment purchased
subsequently was recorded at cost and is being depreciated over the expected
useful lives using the straight-line method.
Goodwill: Relates primarily to the value attributed to the business and the
relationships with various Indiana hospitals served by the Partnership and
its predecessor, MLIL. Goodwill totaling $7,185,254 is being amortized on a
straightline basis over fifteen years.
Income Taxes: No provision for income taxes is required because the allocated
shares of the Partnership's income or loss are included in the income tax
returns of the partners.
NOTE 2--EQUIPMENT LEASE
The Partnership leased a mobile extracorporeal renal shockwave
lithotripter housed in a custom trailer and truck tractor under a five-year
noncancellable capital lease assumed by the Partnership on February 12, 1993.
The lease obligation was payable in monthly installments of $16,823,
including interest imputed at 12%. However, the capital lease was paid in
full in August 1995.
F-133
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Partnership also assumed a three-year service contract for corrective
and preventative maintenance for the lithotripter. Service expense paid
pursuant to this agreement was $72,615 for the year ended September 30, 1995,
$118,261 for the year ended September 30, 1994, and $84,506 for the period
ended September 30, 1993. The contract was cancelled in June 1995, when the
Partnership entered into a thirteen-month service contract with
Servicetrends, a wholly-owned subsidiary of Coram Healthcare Corporation.
Service expense paid pursuant to this new agreement was $23,125 for the year
ended September 30, 1995. The new service contract requires payments totaling
$69,375 in the year ending September 30, 1996.
NOTE 3--RENTAL AGREEMENTS
The Partnership rents its lithotripter to hospitals under three-year
operating leases which include two rental options. Option A was selected by
six hospitals and has a stated fee per lithotripsy procedure with no minimum
usage fee required. Option B was selected by seven hospitals and has
discounted fees based on increased usage and requires a minimum rental fee
which varies by hospital. A hospital may change to the other option after the
initial twelve-month period. The rental agreements are renewable in 1996.
Minimum future rentals to be received under Option B leases total $207,954
for the year ending September 30, 1996.
NOTE 4--RELATED PARTY TRANSACTIONS
Pursuant to a management agreement dated February 12, 1993, MLI, Inc., the
general partner of MLIL, received a monthly management fee based on 7.5% of
the annual pre-tax profits of the Partnership. Effective January 1995, MLI,
Inc. receives a monthly management fee of $9,000. Management fees paid to
MLI, Inc. were $112,981 and $108,275 for the years ended September 30, 1995
and 1994, respectively, and $80,901 for the period ended September 30, 1993.
The Partnership pays consulting fees of $2,000 per month through May 31,
1996, to Heritage Group, Inc., an affiliate of one of MLIL's limited
partners. Consulting fees paid to Heritage Group, Inc. were $24,000 for each
of the years ended September 30, 1995 and 1994, and $16,000 for the period
ended September 30, 1993.
The Partnership purchased supplies from Servicetrends totaling $8,000 in
the year ended September 30, 1995.
NOTE 5--PENSION PLAN
The Partnership contributes to a multi-employer defined contribution
pension plan for all employees who are at least twenty-one years old and who
have a half year of service with the Partnership. Partnership contributions
to the Plan are based on 11% of each participant's annual salary.
Contributions by the Partnership were $15,157 and $13,106 for the years ended
September 30, 1995 and 1994, respectively, and $10,448 for the period ended
September 30, 1993.
NOTE 6--SUBSEQUENT EVENT
On October 9, 1995, the Partnership distributed cash of $200,000 to its
partners.
F-134
<PAGE>
UROMED TECHNOLOGIES, INC.
CONTENTS
<TABLE>
<CAPTION>
Page
-------
<S> <C>
Independent Auditor's Report F-136
Financial Statements:
Balance Sheet F-137
Statement of Income and Retained Earnings F-138
Statement of Cash Flows F-139
Financial Notes F-140
Additional Material:
Schedule of General and Administrative Expenses F-143
</TABLE>
F-135
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
UroMed Technologies, Inc.
We have audited the accompanying balance sheets of UroMed Technologies,
Inc., as of September 28, 1994, December 31, 1993 and 1992, and the related
statements of income and retained earnings and cash flows for the periods
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of UroMed Technologies,
Inc., as of September 28, 1994, December 31, 1993 and 1992, and the results
of its operations and its cash flows for the periods then ended in conformity
with generally accepted accounting principles.
Our audit of the financial statements included in this report was directed
to an expression of our opinion on these statements taken as a whole. The
additional material presented in this report has been subjected to certain
audit procedures applied in connection with our audit of the basic financial
statements. The additional material, while not considered necessary to the
fair presentation of the financial position, results of operations, and cash
flows of the Company, is, in our opinion, fairly stated in all material
respects when considered in relation to the financial statements taken as a
whole.
ROY CLINE, CPA, PA
CERTIFIED PUBLIC ACCOUNTANTS
June 22, 1995
F-136
<PAGE>
UROMED TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 28, December 31, December 31,
1994 1993 1992
---------- -------- --------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash $ 50,332 $ 73,423 $ 24,988
Accounts receivable 392,827 140,847 16,312
Prepaid expenses -- 2,021 498
---------- -------- --------
Total Current Assets 443,159 216,291 41,798
Property and Equipment 1,390,915 698,326 --
Other Assets -- 5,000 --
---------- -------- --------
Total Assets $1,834,074 $919,617 $ 41,798
========== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of capital lease obligations $ 306,183 $176,071 $ --
Accounts payable -- 24,419 --
Accrued bonuses 200,000 -- --
Accrued expenses 45,144 10,024 5,498
---------- -------- --------
Total Current Liabilities 551,327 210,514 5,498
---------- -------- --------
Long-Term Liabilities
Stockholder loan -- 27,000 75,018
Capital lease obligations, exclusive of current
portion 791,430 384,957 --
---------- -------- --------
Total Long-Term Liabilities 791,430 411,957 75,018
---------- -------- --------
Stockholders' Equity
Common stock, $1 par value, 500 shares
authorized, 332 shares issued and outstanding,
168 shares held in treasury 500 500 500
Retained earnings 559,816 365,645 (39,218)
---------- -------- --------
560,316 366,145 (38,718)
Less treasury stock, at cost, 168 shares 68,999 68,999 --
---------- -------- --------
Total Stockholders' Equity 491,317 297,146 (38,718)
---------- -------- --------
Total Liabilities and Stockholders' Equity $1,834,074 $919,617 $ 41,798
========== ======== ========
</TABLE>
The accompanying financial notes are an integral part of the financial
statements.
F-137
<PAGE>
UROMED TECHNOLOGIES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Period
Ended Year Ended
September December Inception to
28, 31, December 31,
1994 1993 1992
----------- ---------- ------------
<S> <C> <C> <C>
Revenues Earned $1,740,469 $1,159,967 $ 23,500
Cost of Revenues 400,535 415,370 38,196
---------- ---------- --------
Gross Profit 1,339,934 744,597 (14,696)
General and Administrative Expenses 800,695 309,699 24,503
---------- ---------- --------
Income From Operations 539,239 434,898 (39,199)
Other Income (Expense)
Interest expense (65,068) (30,035) (19)
---------- ---------- --------
Net Income (Loss) 474,171 404,863 (39,218)
Retained Earnings, beginning of period 365,645 (39,218) --
Less Dividends 280,000 -- --
---------- ---------- --------
Retained Earnings, end of period $ 559,816 $ 365,645 $(39,218)
========== ========== ========
</TABLE>
The accompanying financial notes are an integral part of the financial
statements.
F-138
<PAGE>
UROMED TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Period Ended Year Ended Inception to
September 28, December 31, December 31,
1994 1993 1992
------------- ------------ --------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Cash received from customers $1,488,489 $1,035,433 $ 7,188
Cash paid to suppliers and employees (900,095) (678,620) (57,699)
Interest paid (65,068) (30,035) (19)
---------- ---------- --------
Net Cash Provided (Used) In Operating Activities 523,326 326,778 (50,530)
---------- ---------- --------
Cash Flows From Investing Activities
Cash payments for the purchase of property (80,080) (142,353) --
Payment of deposits 5,000 (5,000) --
---------- ---------- --------
Net Cash Provided (Used) In Investing Activities (75,080) (147,353) --
---------- ---------- --------
Cash Flows From Financing Activities
Proceeds from issuance of common stock -- -- 500
Borrowings from stockholder -- -- 75,018
Purchase of treasury stock -- (68,999) --
Repayments on stockholder loan (27,000) (48,019)
Dividends paid (280,000) -- --
Payments on capital lease obligations (164,337) (13,972) --
---------- ---------- --------
Net Cash Provided (Used) by Financing Activities (471,337) (130,990) 75,518
---------- ---------- --------
Net Increase (Decrease) in Cash (23,091) 48,435 24,988
Cash, beginning of period 73,423 24,988 --
---------- ---------- --------
Cash, end of period $ 50,332 $ 73,423 $ 24,988
========== ========== ========
</TABLE>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED (USED) BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net income (loss) for the period $ 474,171 $ 404,863 $(39,218)
--------- --------- --------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 88,413 19,027 --
(Increase) decrease in accounts receivable (251,980) (124,534) (16,312)
(Increase) decrease in prepaid expenses 2,021 (1,523) (498)
Increase (decrease) in accounts payable (24,419) 24,419 --
Increase (decrease) in accrued liabilities 235,120 4,526 5,498
--------- --------- --------
Total Adjustments 49,155 (78,085) (11,312)
--------- --------- --------
Net Cash Provided (Used) In Operating Activities $ 523,326 $ 326,778 $(50,530)
========= ========= ========
Supplemental disclosures:
Capital lease obligations incurred in connected
with asset acquisitions
Assets acquired $ 781,002 $ 717,353 $ --
Liabilities assumed 700,922 575,000 --
--------- --------- --------
Cash given $ 80,080 $ 142,353 $ --
========= ========= ========
</TABLE>
The accompanying financial notes are an integral part of the financial
statements.
F-139
<PAGE>
UROMED TECHNOLOGIES, INC.
FINANCIAL NOTES
1. Summary of Significant Accounting Policies
Company's Activities and Operating Cycle
The Company was incorporated June 8, 1992 under the laws of the State of
Florida. The Company is engaged in the business of providing medical
lithotripsy services to Florida-based hospitals and ambulatory surgery
centers. The Company staffs its mobile lithotripters with a licensed tractor
trailer operator and a licensed radiographic technologist who assists the
attending physician. The mobile lithotripter makes scheduled visits to
various client hospitals and ambulatory surgery centers where local
urologists generally perform one or more procedures per site visit.
Revenue Recognition
Revenue is recognized at the Company's established rates at the time
services are provided. Net calculated adjustments arising under reimbursement
rates with third party payors are accrued on an estimated basis in the period
in which the services are rendered and adjusted as final settlements are
determined.
Property and Equipment
Property and equipment is recorded at cost. For financial statement
purposes depreciation is provided over the estimated useful lives of the
related assets using the straight-line method. The estimated useful lives of
the depreciable assets are:
<TABLE>
<CAPTION>
<S> <C>
Mobile Lithotripter Units 10 years
Lithotripter Unit Improvements 10 years
Furniture and Equipment 10 years
Office Machinery 7 years
</TABLE>
Lease agreements for equipment, which are equivalent to installment
purchase contracts, are recognized as capital leases by the Company. All of
the Company's capital leases have bargain purchase options and the Company is
amortizing the related assets over their estimated economic lives.
Expenditures for maintenance and repairs are charged to operations as
incurred. The cost of assets sold or retired and the related amounts of
accumulated depreciation are eliminated from the accounts in the year of
disposal and the resulting gains or losses are included in operations.
Income Taxes
The Company, with the consent of its shareholders, has elected under the
Internal Revenue Code to be an S corporation. In lieu of corporate income
taxes, the shareholders of an S corporation are taxed on their proportionate
share of the company's taxable income. Therefore, no provision or liability
for Federal income taxes has been included in the financial statements.
Bad Debts
Individual customer accounts are reviewed periodically for collectibility.
Specifically identified uncollectible amounts are charged to expense in the
period in which the accounts are deemed worthless.
Cash Flows
For purposes of reporting cash flows, cash includes demand deposits with
banks.
F-140
<PAGE>
UROMED TECHNOLOGIES, INC.
FINANCIAL NOTES--(Continued)
2. Stockholders' Equity
The following is the changes in stockholders' equity:
<TABLE>
<CAPTION>
Period Ended Year Ended Inception to
September 28, December 31, December 31,
1994 1993 1992
--------------- -------------- ----------------
<S> <C> <C> <C>
Beginning Balance $ 297,146 $(38,718) $ --
Common stock issued, $1 par value, 500
shares authorized, issued and outstanding -- -- 500
Less treasury stock 168 shares -- (68,999) --
Net Income (Loss) 474,171 404,863 (39,218)
Less dividends (280,000) -- --
--------- -------- --------
Total Stockholders' Equity $ 491,317 $297,146 $(38,718)
========= ======== ========
</TABLE>
3. Commitments and Contingencies
In the normal course of business, the company entered into a capital lease
agreement in September 1993. As of December 31, 1993, the equipment was not
fully operational. The equipment became fully operational in March, 1994. At
that time, the company paid interest payments only for three months then the
first lease payment of principal and interest was due June 24, 1994.
4. Property and Equipment
The Company's property, equipment, and the related depreciation and
amortization:
<TABLE>
<CAPTION>
Accumulated Net
Original Current Amortization- Book
Cost Depreciation Depreciation Value
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Lithotripter Unit Improvements $ 217,694 $13,696 $ 13,696 $ 203,998
Mobile Lithotripter Units 1,270,000 73,933 92,698 1,177,302
Furniture and Equipment 9,163 717 978 8,185
Office machinery 1,497 67 67 1,430
---------- ------- -------- ----------
Totals for September 28, 1994 $1,498,354 $88,413 $107,439 $1,390,915
========== ======= ======== ==========
Trailer $ 134,475 $13,447 $ 13,447 $ 121,028
Mobile Lithotripter Unit 575,000 4,792 4,792 570,208
Office furniture 7,878 788 788 7,090
---------- ------- -------- ----------
Totals for December 31, 1993 $ 717,353 $19,027 $ 19,027 $ 698,326
========== ======= ======== ==========
</TABLE>
F-141
<PAGE>
UROMED TECHNOLOGIES, INC.
FINANCIAL NOTES--(Continued)
5. Capital Lease Obligation
<TABLE>
<CAPTION>
Period Ended Year Ended Inception to
September 28, December 31, December 31,
1994 1993 1992
--------------- -------------- ----------------
<S> <C> <C> <C>
Capital lease obligation payable in monthly
installments of $18,285 including interest at 9%,
collateralized by Mobile Lithotripter, final payment
due November 1996 $ 430,465 $561,028 $--
Capital lease obligation payable in monthly
installments of $14,427 including interest at 9%,
collateralized by Mobile Lithotripter, final payment
due May 1999 667,148 -- --
---------- -------- ---
Total amount due 1,097,613 561,028 --
Amount due within one year 306,183 176,071 $--
---------- -------- ---
Long-term amount $ 791,430 $384,957 $--
========== ======== ===
</TABLE>
The following is the future minimum lease payments.
<TABLE>
<CAPTION>
Period Ended Year Ended Inception to
September 28, December 31, December 31,
---------------- --------------- -----------------
<S> <C> <C> <C>
1994 $ -- $219,418 $--
1995 392,543 219,418 --
1996 392,543 201,133 --
1997 209,694 -- --
1998 173,125 -- --
1999 115,416 -- --
---------- -------- ---
Total minimum lease payments 1,283,321 639,969 --
Less amounts representing interest 185,708 78,941 --
---------- -------- ---
Present value of net minimum lease payments $1,097,613 $561,028 $--
========== ======== ===
</TABLE>
6. Profit-Sharing Plan
All employees are eligible to participate in the Company's Profit-Sharing
Plan as long as they are at least 21 years of age and have completed one year
of employment. The Plan provides for contributions by the Company in such
amounts as management may determine. The profit-sharing contributions charged
to operations were $57,367 for the period ended September 28, 1994.
7. Event Subsequent to the Date of the Report of Independent Auditor
On September 29, 1994, the Company sold substantially all of its assets
for cash and the assumption of the Company's lease obligations.
F-142
<PAGE>
UROMED TECHNOLOGIES, INC.
SCHEDULE OF GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Period Ended Year Ended Inception to
September 28, December 31, December 31,
1994 1993 1992
--------------- -------------- ----------------
<S> <C> <C> <C>
Accounting fees $ 17,162 $ 6,524 $ 217
Salary--officers 333,000 128,939 8,308
Advertising and promotion 4,571 9,229 1,263
Auto and truck 26,723 5,229 --
Bank charges -- 92 31
Continuing education 1,298 -- --
Professional fees 36,215 135 --
Contract labor 1,766 741 --
Contributions 2,000 500 --
Depreciation and amortization 88,413 19,027 --
Dues and subscriptions 210 709 --
Insurance expense 46,331 27,917 4,542
Legal fees 2,551 3,932 --
Licenses and taxes 7,584 -- 437
Travel and entertainment 35,498 41,756 --
Office expense 1,634 8,710 341
Medical directors 97,500 -- --
Miscellaneous 2,879 95 --
Office salaries -- -- 6,058
Rent--location 5,634 11,571 850
Taxes--payroll 16,995 26,425 1,556
Telephone and utilities 15,364 18,168 900
Pension contribution 57,367 -- --
-------- -------- -------
Total $800,695 $309,699 $24,503
======== ======== =======
</TABLE>
F-143
<PAGE>
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
NUTRICHEM, INC.
We have audited the accompanying balance sheets of Nutrichem, Inc. as of
November 17, 1994, and December 31, 1993 and the related statements of
income, retained earnings, and cash flows for the periods then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nutrichem, Inc. as of
November 17, 1994 and December 31, 1993, and the results of its operations
and its cash flows for the periods then ended in conformity with generally
accepted accounting principles.
The December 31, 1993 financial statements were previously reviewed, and
our report thereon, dated February 24, 1994, stated we were not aware of any
material modifications that should be made to those statements for them to be
in conformity with generally accepted accounting principles. However, a
review is substantially less in scope than an audit and does not provide a
basis for the expression of an opinion on the financial statement taken as a
whole.
Regan, Russell, Schickner & Shah, P.A.
September 13, 1995
F-144
<PAGE>
NUTRICHEM, INC.
BALANCE SHEETS
NOVEMBER 17, 1994 AND DECEMBER 31, 1993
<TABLE>
<CAPTION>
1994 1993
--------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 452,509 $ 103,468
Marketable securities 24,875 --
Accounts receivable (net of allowance of $402,052 and
$0, respectively) 2,455,506 950,838
Loan receivable--stockholder 28,000 --
Inventory 139,135 --
Deposits 12,421 17,000
Advances to employees 1,405 2,030
---------- ----------
Total current assets 3,113,851 1,073,336
---------- ----------
Property and equipment:
Machinery and equipment 150,521 6,656
Transportation equipment 15,200 40,999
Office furniture and fixture 26,080 19,303
Leasehold improvements 3,592 3,592
---------- ----------
195,393 70,550
Less: Accumulated depreciation 21,954 2,849
---------- ----------
173,439 67,701
---------- ----------
$3,287,290 $1,141,037
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 311,766 $ 110,723
Loan payable--stockholders -- 102,902
Payroll taxes payable 6,114 17,136
Accrued payroll 12,644 --
Other accrued expenses 17,594 41,585
---------- ----------
Total current liabilities 348,118 272,346
---------- ----------
Stockholders' equity:
Common stock--no par value; authorized 5,000 shares;
issued and outstanding 1,000 shares 1,000 1,000
Retained earnings 2,938,172 867,691
---------- ----------
2,939,172 868,691
---------- ----------
$3,287,290 $1,141,037
========== ==========
</TABLE>
See Independent Audit Report.
The accompanying notes are an integral part of these financial statements.
F-145
<PAGE>
NUTRICHEM, INC.
STATEMENTS OF INCOME
For the Period Ended November 17, 1994 and December 31, 1993
<TABLE>
<CAPTION>
1994 1993
Amount Amount
--------- -----------
<S> <C> <C>
Earned Revenues $4,492,523 $2,142,122
---------- ----------
Direct Expenses:
Medications and related costs 957,920 414,648
Medical supplies. 79,145 50,185
Salaries--pharmacist 49,821 62,151
Outside pharmacy services 73,155 91,922
Nursing costs 175,118 62,511
Medical consultation fees 128,053 67,650
Other direct expenses 13,800 15,644
---------- ----------
Total direct expenses. 1,477,012 764,711
---------- ----------
Operating, Selling and Administrative
Expenses:
Auto expenses 42,656 9,251
Bookkeeping services 23,768 10,766
Commissions 249,123 --
Conventions, meetings, and seminars 17,442 25,906
Depreciation 28,996 2,849
Entertainment 41,425 13,383
Insurance 43,689 11,482
Legal and professional expenses 42,485 23,118
Miscellaneous 8,948 --
Office expense 64,844 19,138
Pension expense -- 41,585
Rent 18,491 13,686
Salaries--office 103,435 30,124
Salaries--officers 174,487 155,339
Taxes--payroll 36,255 13,489
Telephone and answering service 48,986 36,702
---------- ----------
Total operating, selling and administrative
expenses 945,030 406,818
---------- ----------
Net Income $2,070,481 $ 970,593
========== ==========
</TABLE>
See Independent Audit Report.
The accompanying notes are an integral part of these financial statements.
F-146
<PAGE>
NUTRICHEM, INC.
STATEMENTS OF RETAINED EARNINGS
For the Period Ended November 17, 1994 and December 31, 1993
<TABLE>
<CAPTION>
1994 1993
--------- ----------
<S> <C> <C>
ACCUMULATED ADJUSTMENTS ACCOUNT
Balance--Beginning $ 867,691 $ --
Net Income 2,070,481 970,593
Stockholder Distributions -- (102,902)
---------- ---------
Balance--Ending $2,938,172 $ 867,691
========== =========
</TABLE>
See Independent Audit Report.
The accompanying notes are an integral part of these financial statements.
F-147
<PAGE>
NUTRICHEM, INC.
STATEMENTS OF CASH FLOWS
For the Period Ended November 17, 1994 and December 31, 1993
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 2,070,481 $ 970,593
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 28,996 2,849
(Increase) Decrease in operating assets:
Inventory (139,135) --
Marketable securities (24,875) --
Accounts receivable (1,504,668) (950,838)
Deposits 4,579 (17,000)
Increase (Decrease) in operating liabilities:
Accounts payable 201,043 110,723
Payroll taxes payable (11,022) 17,136
Accrued payroll 12,644 --
Other accrued expenses (23,991) 41,585
----------- ---------
Net cash provided by operating activities $ 614,052 $ 175,048
=========== =========
</TABLE>
See Independent Audit Report.
The accompanying notes are an integral part of these financial statements.
F-148
<PAGE>
NUTRICHEM, INC.
STATEMENTS OF CASH FLOWS
For the Period Ended November 17, 1994 and December 31, 1993
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Net Cash Provided by Operating Activities $ 614,052 $175,048
--------- --------
Cash Flows From Investing Activities:
Proceeds from sale of fixed assets 45,605 --
Purchase of equipment (180,339) (70,550)
Advances to employees -- (2,030)
Loan repayment from employees 625 --
Loan to stockholders (28,000) --
--------- --------
Net cash used by investing activities (162,109) (72,580)
--------- --------
Cash Flow From Financing Activities:
Debt reduction (102,902) --
Proceeds from issuance of stock -- 1,000
--------- --------
Net cash (used) provided by financing activities (102,902) 1,000
--------- --------
Net Increase in Cash 349,041 103,468
Cash--Beginning 103,468 --
--------- --------
Cash--Ending $ 452,509 $103,468
========= ========
</TABLE>
See Independent Audit Report.
The accompanying notes are an integral part of these financial statements.
F-149
<PAGE>
NUTRICHEM, INC.
NOTES TO FINANCIAL STATEMENTS
November 17, 1994 and December 31, 1993
NOTE 1--Summary of Significant Accounting Policies
This summary of significant accounting policies of Nutrichem, Inc. is
presented to assist in understanding the Company's financial statements. The
financial statements and notes are representations of the Company's
management who is responsible for their integrity and objectivity. These
accounting policies conform to generally accepted accounting principles and
have been consistently applied in the preparation of the financial
statements.
Business activity. The Company is a Maryland corporation organized to provide
medical services on an out- patient or in-home basis. The Company's
significant service operations commenced in March 1993. The Company has a
year end of December 31.
Inventory. The Company values inventories at the lower of cost (first-in,
first-out method) or market. The inventory consists of medication and medical
supplies.
Property and equipment. Property and equipment are stated at cost. Individual
purchases over $300 and improvements which prolong the useful life of an
asset are capitalized, while expenditures for maintenance, small items and
minor repairs are expensed as incurred. Depreciation for financial statement
purposes is calculated on the straight-line method and is provided on a
consistent basis, based upon the estimated useful life of the particular
asset. The Company has adopted the Modified Accelerated Cost Recovery System
(MACRS) for income tax purposes.
Income taxes. Effective January 1, 1994, the Company changed its method of
accounting for income tax purposes from overall cash basis to overall accrual
basis under Internal Revenue Code 446, Revenue Procedure 92-74. On November
17, 1994, CCC-Infusion, Inc., a "C" Corporation purchased 80% of the
outstanding stock of Nutrichem, Inc. As a result of this stock transfer,
Nutrichem Inc.'s status as a Subchapter "S" corporation terminated under
Internal Revenue Code Section 1361 (b) (1) (B). Consequently, the Company is
taxed as a "S" Corporation for the short year ended November 17, 1994 and as
a "C" Corporation for the period November 18, 1994 through December 31, 1994.
As such, profits and losses of the "S" Corporation for the short-year ended
November 17, 1994 are passed through to the stockholders and are recorded on
their personal income tax returns.
NOTE 2--Accounts Receivable
At November 17, 1994, the allowance for contractual adjustments and bad
debts amounted to $402,052. The allowance is based on the Company's
collection history and current trends.
At December 31, 1993, accounts receivable includes unbilled accounts
receivable in the amount of $447,070 for services provided prior to December
31, 1993. Subsequent to December 31, 1993, the Company has collected all of
its accounts receivable outstanding at December 31, 1993.
NOTE 3--Related Party Transaction
At November 17, 1994, the Company had an outstanding loan receivable from
its stockholder, Raj Mantena amounting to $28,000. The loan was repaid
December 4, 1994.
At December 31, 1993, the Company had outstanding loans payable to its
stockholders, John Chay and Raj Mantena, amounting to $27,372 and $75,530
respectively, totaling $102,902. The loans are payable upon demand.
See Independent Audit Report.
F-150
<PAGE>
NUTRICHEM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
November 17, 1994 and December 31, 1993
NOTE 4--Pension Plan
The Company has a simplified employee pension plan that covers all
qualified employees. Contributions to the plan are at the discretion of the
Board of Directors. For the period ended November 17, 1994, the Board of
Director's have elected not to contribute to the plan. During 1993,
contributions to the plan charged to operations were $41,586.
NOTE 5--Supplemental Disclosures of Cash Flow Information
Noncash Financing Activities
For the period ending December 31, 1993, the Company had noncash financing
activities in the amount of $102,902 relating to stockholder distributions
and loans.
See Independent Audit Report.
F-151
<PAGE>
To the Stockholders of
FirstChoice Home Care, Inc.
Boca Raton, Florida
We have audited the accompanying balance sheet of FirstChoice Home Care,
Inc. (an S corporation) as of December 31, 1993, and November 22, 1994, and
the related statements of income, retained earnings, and cash flows for the
year and the interim ten months and 22 days then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of
FirstChoice Home Care, Inc. as of December 31, 1993, and November 22, 1994,
and the results of their operations and their cash flows for the year and
interim period then ended in conformity with generally accepted accounting
principles.
Patrick & Associates, P.A.
June 8, 1995
See Independent Audit Report.
F-152
<PAGE>
FIRSTCHOICE HOME CARE, INC.
BOCA RATON, FLORIDA
BALANCE SHEETS
December 31, 1993, and November 22, 1994
<TABLE>
<CAPTION>
1993 1994
----------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 25,686 $ 67,406
Accounts receivable 385,864 116,244
Prepaid expenses 7,755 1,333
Due from shareholders 20 31,137
-------- --------
Total current assets $419,325 $216,120
Property & Equipment:
Furniture and fixtures 15,717 15,611
Less accumulated depreciation (1,474) (4,374)
-------- --------
Total Property & Equipment 14,243 11,237
Other Assets:
Organization cost 17,275 12,957
Deposits 537 537
-------- --------
Total other assets 17,812 13,494
-------- --------
Total assets $451,380 $240,851
======== ========
LIABILITIES
Current liabilities:
Accounts payable $215,011 $131,652
Note payable--Medicare 15,402 0
Payroll taxes payable 4,555 8,810
Accrued payroll 14,206 11,084
Accrued pension contribution 54,457 0
Due to related parties 27,917 0
Other current liabilities 583 0
Other accrued expenses 0 10,535
Notes payable--current portion 105,000 105,000
-------- --------
Total current liabilities $437,131 $267,081
Long term Liabilities:
Accrued vacation liabilities 31,663 55,163
-------- --------
Total liabilities $468,794 $322,244
EQUITY
Common stock (par value $.01, 100,000 shares authorized,
2,000 issued) 20 20
Accumulated deficit (17,434) (81,413)
-------- --------
Total equity (17,414) (81,393)
-------- --------
Total liabilities and equity $451,380 $240,851
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
See Independent Audit Report.
F-153
<PAGE>
FIRSTCHOICE HOME CARE, INC.
BOCA RATON, FLORIDA
STATEMENTS OF INCOME AND RETAINED EARNINGS
Year Ending December 31, 1993, and Interim Period Ending November 22, 1994
<TABLE>
<CAPTION>
1993 1994
--------- -----------
<S> <C> <C>
Net patient service revenue $1,757,001 $2,448,645
Operating expenses:
Professional care of patients 1,065,670 1,489,830
Administrative and general 631,872 880,420
Depreciation and amortization 6,451 7,009
Interest expense 10,105 21,966
Rent expense 77,660 115,449
---------- ----------
Total operating expenses 1,791,758 2,514,674
---------- ----------
Net operating loss (34,757) (66,029)
Other income 1,070 2,050
---------- ----------
Net loss (33,687) (63,979)
Accumulated deficit--beginning 16,253 (17,434)
---------- ----------
Accumulated deficit--ending $ (17,434) $ (81,413)
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
See Independent Audit Report.
F-154
<PAGE>
FIRST CHOICE HOME CARE, INC.
BOCA RATON, FLORIDA
STATEMENTS OF CASH FLOWS
For Year Ending December 31, 1993, and Interim Period Ending November 22, 1994
<TABLE>
<CAPTION>
1993 1994
-------- ----------
<S> <C> <C>
Cash flow from operating activities
Net loss $ (33,687) $(63,979)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation expense 1,503 2,691
Amortization expense 4,711 4,318
(Increase) Decrease in:
Accounts receivable (187,420) 269,620
Due from related parties 0 (31,117)
Prepaid expenses (7,755) 6,422
Deposits 1,346 0
Increase (Decrease) in:
Trade accounts & notes payable 224,333 (98,761)
Payroll taxes payable 4,149 4,255
Accrued expenses 6,287 (47,044)
Other current liabilities 583 (583)
Due to related parties 0 (27,917)
Accrued vacation liabilities 31,663 23,500
--------- --------
Total adjustments 79,400 105,384
--------- --------
Net cash provided by operating activities 45,713 41,405
Cash flows from investing activities
Purchase of equipment (15,717) 315
--------- --------
Net cash used by investing activities (15,717) 315
--------- --------
Cash flows from financing activities
Payment on short term notes (12,149) 0
--------- --------
Net cash provided by financing activities (12,149) 0
--------- --------
Net decrease in cash 17,847 41,720
Beginning cash 7,839 25,686
--------- --------
Ending cash $ 25,686 $ 67,406
========= ========
Supplemental Disclosures
Interest paid $ 10,105 $ 21,966
Income taxes paid $ 0 $ 0
</TABLE>
The accompanying notes are an integral part of these statements.
See Independent Audit Report.
F-155
<PAGE>
FIRSTCHOICE HOME CARE, INC.
BOCA RATON, FLORIDA
NOTES TO FINANCIAL STATEMENTS
December 31, 1993, and November 22, 1994
NOTE 1--Summary of Significant Accounting Policies
This summary of significant accounting policies of FirstChoice Health
Care, Inc. (the Company) is presented to assist in the understanding of the
Company's financial statements. The financial statements and notes are the
representation of Company's management who are responsible for their
integrity and objectivity. Management's accounting policies conform with the
generally accepted accounting principles and have been consistently applied
in the preparation of these financial statements.
Business Activity. The Company provides health care services "in the home"
based on a course of treatment prescribed by the patients' physician. The
Company is compensated for its services primarily by Medicare, but
compensation can also be from Medicaid, private payments and private
insurance.
Concentrations of Credit Risk. At November 22, 1994, amounts due from
Medicare were $113,095.
Cash. Cash, for purposes of the statement of cash flows consists of checking
and bank money market accounts.
Revenue and Cost Recognition. The primary funding source, Medicare,
compensates the Company on a "cost reimbursement" basis, meaning Medicare
covers all reasonable cost incurred in providing patient care. Therefore,
there will be no "profit" in the traditional sense. "Profit" is realized
indirectly through owners' compensation and benefits, acquisition of assets,
and deferred compensation.
Depreciation. Depreciation is determined principally on the straight-line
method over the estimated useful lives of the assets, using the American
Hospital Association's "Estimated Useful Lives of Depreciable Hospital
Assets" Guidebook, 1983 edition or 1988 edition. If an asset is not in the
AHA Guide, regulations of the Internal Revenue Service are used.
Income Taxes. The Company has elected to be taxed as an "S" corporation,
where net income is generally reported on a pro-rata basis to each
shareholder, who in turn reports that income on their personal income tax
return.
NOTE 2--Related Party Transactions
Intercompany transactions occur between First Choice Network (Home Office)
and First Choice Health Care Services of Ft. Lauderdale, Inc. Both of these
entities are wholly owned by the shareholders of this Company. Intercompany
transactions consist primarily of loans to and from these companies and the
providing of administrative and general services at cost. It is the practice
of the Company to liquidate this balance on a periodic basis.
NOTE 3--Property and Equipment
The majority of the equipment used by the Company has been acquired
through operating leases, and are therefore not capitalized. Property and
equipment purchased is carried at cost. Expenditures for maintenance and
repairs are charged as the expense is incurred.
See Independent Audit Report.
F-156
<PAGE>
FIRSTCHOICE HOME CARE, INC.
BOCA RATON, FLORIDA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and equipment are summarized by major classification as follows:
<TABLE>
<CAPTION>
December
31, November 22,
1993 1994
---------- ------------
<S> <C> <C>
Computer Equipment $15,275 $13,795
Allocation of Home Office Property and Equipment 442 1,816
------- -------
15,717 15,611
Less Accumulated Depreciation 1,474 4,374
------- -------
Net Property and Equipment $14,243 $11,237
======= =======
</TABLE>
NOTE 4--Notes Payable
Notes payable consist of notes due to six individuals. The notes are
renewable on an annual basis at the discretion of the lender. Most of the
notes are collateralized by accounts receivable. All of the notes have an
annual interest rate of 15% of principal and were paid as a condition of the
sale described in Note 7.
NOTE 5--Pension Plan
The Company has sponsored a defined contribution pension plan, covering
substantially all of its employees. The plan is a qualified plan under ERISA.
Enrollment for employees is in January and July of each year. If the enrolled
employee was still employed at year end, the Company accrued a contribution
equal to 12% of the employee's current year gross wage. The accrued
contribution must be paid to the plan by September 15 of the following year.
The expense recorded in 1993 was $54,457. The plan has been terminated in
1994 as a result of the sale described in Note 7 and all vested amounts will
be distributed.
NOTE 6--Contingencies
The Company derives a substantial portion of its revenues through cost
reimbursement from Medicare. The reimbursements are based on quarterly
interim reports followed by an annual final cost report submitted to the
intermediary for the Medicare system. These reports are subject to audit and
adjustments for a period of three years following the final cost report
filing date. Should subsequent audits result in adjustment of previously
submitted costs, these adjustments would be made as an offset to future
revenues, which could have an impact on future operation. Future revenues of
the Company, as a contractor with the federal government, could be affected
by future legislation, should the Medicare system be changed in any material
manner.
NOTE 7--Sale of Business Assets
The Company entered into an asset purchase agreement with FC DST-9 Act.
Corp. on August 30, 1994, to sell essentially all of the assets and
liabilities, including the corporate name, of this Company for $900,000. This
sale was completed on November 22, 1994. All accrued amounts due to the
shareholders of this company were paid at that closing. All amounts due on
notes payable to individuals were paid along with interest on November 22,
1994. These statements do not reflect any of the effects of this sale
transaction.
See Independent Audit Report.
F-157
<PAGE>
To the Stockholders of
First Choice Health Care of Ft. Lauderdale, Inc.
Boca Raton, Florida
We have audited the accompanying balance sheet of First Choice Health Care
Services of Ft. Lauderdale, Inc. (an S corporation) as of December 31, 1993,
and November 22, 1994, and the related statements of income, retained
earnings, and cash flows for the year and the interim ten months and 22 days
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of First
Choice Health Care Services of Ft. Lauderdale, Inc. as of December 31, 1993,
and November 22, 1994, and the results of their operations and their cash
flows for the year and interim period then ended in conformity with generally
accepted accounting principles.
Patrick & Associates, P.A.
June 8, 1995
See Independent Audit Report.
F-158
<PAGE>
FIRST CHOICE HEALTH CARE OF FT. LAUDERDALE, INC.
BOCA RATON, FLORIDA
BALANCE SHEETS
December 31, 1993, and November 22, 1994
<TABLE>
<CAPTION>
1993 1994
-------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash $ 53,445 $ 16,104
Accounts receivable 409,990 357,135
Due from related parties 27,917 2,070
--------- ---------
Total current assets 491,352 375,309
Property & Equipment
Furniture and fixtures 17,425 23,013
Less accumulated depreciation (3,415) (7,213)
--------- ---------
Total Property & Equipment 14,010 15,800
Other assets
Deposits 4,175 3,913
--------- ---------
Total assets $ 509,537 $ 395,022
========= =========
LIABILITIES
Current liabilities
Accounts payable--trade $ 156,345 $ 210,644
Note payable--Medicare 8,015 57,060
Payroll taxes payable 14,698 11,260
Accrued payroll 33,874 14,701
Accrued pension contribution 145,543 16,217
Other current liabilities 7,751 205,000
Notes payable--current 205,000 31,117
--------- ---------
Total Current Liabilities 571,226 545,999
Long term liabilities
Accrued vacation liabilities 68,228 78,362
--------- ---------
Total liabilities $ 639,454 $ 624,361
EQUITY
Common Stock (par value $1, 7,000 shares
authorized, 100 issued) 100 100
Accumulated deficit (130,017) (229,439)
--------- ---------
Total equity (129,917) (229,339)
--------- ---------
Total liabilities and equity $ 509,537 $ 395,022
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
See Independent Audit Report.
F-159
<PAGE>
FIRST CHOICE HEALTH CARE OF FT. LAUDERDALE, INC.
BOCA RATON, FLORIDA
STATEMENTS OF INCOME AND RETAINED EARNINGS
Year Ending December 31, 1993, and Interim Period Ending November 22, 1994
<TABLE>
<CAPTION>
1993 1994
--------- -----------
<S> <C> <C>
Net patient service revenue $4,060,691 $5,343,636
Operating expenses:
Professional care of patients 2,353,134 3,855,465
Administrative and general 1,528,149 1,396,519
Depreciation 2,441 4,267
Interest expense 46,716 30,203
Rent expense 103,448 158,716
---------- ----------
Total operating expenses 4,033,888 5,445,170
---------- ----------
Net operating income 26,803 (101,534)
Other income 2,569 2,112
---------- ----------
Net income 29,372 (99,422)
Accumulated deficit--beginning (159,389) (130,017)
---------- ----------
Accumulated deficit--ending $ (130,017) $ (229,439)
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
See Independent Audit Report.
F-160
<PAGE>
FIRST CHOICE HEALTH CARE OF FT. LAUDERDALE, INC.
BOCA RATON, FLORIDA
STATEMENTS OF CASH FLOWS
For Year Ending December 31, 1993, and Interim Period Ending November 22, 1994
<TABLE>
<CAPTION>
1993 1994
-------- ----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 29,372 $ (99,422)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation expense 2,441 4,267
(Increase) Decrease in:
Accounts receivable 121,275 52,855
Due from related parties 0 25,847
Deposits 4,822 262
Increase (Decrease) in:
Trade accounts & notes payable (73,994) 46,284
Bank Overdraft 0 57,060
Payroll taxes payable (21,216) (3,438)
Accrued expenses (48,647) (164,716)
Other current liabilities 1,398 8,466
Due to related parties 0 31,117
Accrued vacation liabilities 23,119 10,134
--------- ---------
Total adjustments 9,198 68,138
--------- ---------
Net cash provided by operating activities 38,570 (31,284)
Cash flows from investing activities:
Purchase of equipment (8,521) (6,057)
Net cash used by investing activities (8,521) (6,057)
Cash flows from financing activities:
Payment on short term notes (147,278) 0
--------- ---------
Net cash provided by financing activities (147,278) 0
--------- ---------
Net decrease in cash (117,229) (37,341)
Beginning cash 170,674 53,445
--------- ---------
Ending cash $ 53,445 $ 16,104
========= =========
Supplemental Disclosures:
Interest paid $ 46,716 $ 30,203
Income taxes paid $ 0 $ 0
</TABLE>
The accompanying notes are an integral part of these statements.
See Independent Audit Report.
F-161
<PAGE>
FIRST CHOICE HEALTH CARE SERVICES OF FT. LAUDERDALE, INC.
BOCA RATON, FLORIDA
NOTES TO FINANCIAL STATEMENTS
December 31, 1993, and November 22, 1994
NOTE 1--Summary of Significant Accounting Policies
This summary of significant accounting policies of First Choice Health
Care Services of Ft. Lauderdale, Inc. (the Company) is presented to assist in
the understanding of the Company's financial statements. The financial
statements and notes are the representation of Company's management who are
responsible for their integrity and objectivity. Management's accounting
policies conform with the generally accepted accounting principles and have
been consistently applied in the preparation of these financial statements.
Business Activity. The Company provides health care services "in the home"
based on a course of treatment prescribed by the patients' physician. The
Company is compensated for its services primarily by Medicare, but
compensation can also be from Medicaid, private payments and private
insurance.
Concentrations of Credit Risk. November 22, 1994, amounts due from Medicare
were $399,819 less an accrued amount of $42,785.
Cash. Cash, for purposes of the statement of cash flows consists of checking
and bank money market accounts.
Revenue and Cost Recognition. The primary funding source, Medicare,
compensates the Company on a "cost reimbursement" basis, meaning Medicare
covers all reasonable cost incurred in providing patient care. Therefore,
there will be no "profit" in the traditional sense. "Profit" is realized
indirectly through owners' compensation and benefits, acquisition of assets,
and deferred compensation.
Depreciation. Depreciation is determined principally on the straight-line
method over the estimated useful lives of the assets, using the American
Hospital Association's "Estimated Useful Lives of Depreciable Hospital
Assets" Guidebook, 1983 edition or 1988 edition. If an asset is not in the
AHA Guide, regulations of the Internal Revenue Service are used.
Income Taxes. The Company has elected to be taxed as an "S" corporation,
where net income is generally reported on a pro-rata basis to each
shareholder, who in turn reports that income on their personal income tax
return.
NOTE 2--Related Party Transactions
Intercompany transactions occur between First Choice Network (Home Office)
and First Choice Home Care, Inc. Both of these entities are wholly owned by
the shareholders of the Company. Intercompany transactions consist primarily
of loans to and from these companies and the providing of administrative and
general services at cost. It is the practice of the Company to liquidate this
balance on a periodic basis.
NOTE 3--Property and Equipment
The majority of the equipment used by the Company has been acquired
through operating leases, and are therefore not capitalized. Property and
equipment purchased is carried at cost. Expenditures for maintenance and
repairs are charged as the expense is incurred.
F-162
<PAGE>
FIRST CHOICE HEALTH CARE SERVICES OF FT. LAUDERDALE, INC.
BOCA RATON, FLORIDA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and equipment are summarized by major classification as follows:
<TABLE>
<CAPTION>
December
31, November 22,
1993 1994
---------- ------------
<S> <C> <C>
Computer and communication equipment $ 7,043 $10,599
Leasehold improvements 5,661 5,662
Furniture 3,648 3,931
Allocation of home office property and equipment 1,073 2,821
------- -------
Total 17,425 23,013
Less: accumulated depreciation 3,415 7,213
------- -------
Total $14,010 $15,800
======= =======
</TABLE>
NOTE 4--Notes Payable
Notes payable consist of notes due to six individuals. These notes are
renewable on an annual basis at the discretion of the lender. Most of the
notes are collateralized by accounts receivable. All of the notes have an
annual interest rate of 15% of principal and were paid as a condition of the
sale described in Note 7.
NOTE 5--Pension Plan
The Company has sponsored a defined contribution pension plan, covering
substantially all of its employees. The plan is a qualified plan under ERISA.
Enrollment for employees is in January and July of each year. If the enrolled
employee was still employed at year end, the Company accrued a contribution
equal to 12% of the employee's current year gross wage. The accrued
contribution must be paid to the plan by September 15 of the following year.
The expense recorded in 1993 was $145,543. The plan has been terminated in
1994 as a result of the sale described in Note 7 and all vested amounts will
be distributed.
NOTE 6--Contingencies
The Company derives a substantial portion of its revenues through cost
reimbursement from Medicare. The reimbursements are based on quarterly
interim reports followed by an annual final cost report submitted to the
intermediary for the Medicare system. These reports are subject to audit and
adjustments for a period of three years following the final cost report
filing date. Should subsequent audits result in adjustment of previously
submitted costs, these adjustments would be made as an offset to future
revenues, which could have an impact on future operation. Future revenues of
the Company, as a contractor with the federal government, could be affected
by future legislation, should the Medicare system be changed in any material
manner.
NOTE 7--Sale of Business Assets
The Company entered into an asset purchase agreement with FC DST-10 Acq.
Corp. on August 30, 1994, to sell essentially all of the assets and
liabilities, including the corporate name, of this Company for $1,000,000.
This sale was completed on November 22, 1994. All accrued amounts due to the
shareholders of this company were paid at that closing. All amounts due on
notes payable to individuals were paid along with interest on November 22,
1994. These statements do not reflect any of the effects of this sale
transaction.
See Independent Audit Report.
F-163
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
Whittle, Varnell and Bedoya, P.A.:
We have audited the accompanying balance sheets of Whittle, Varnell and
Bedoya, P.A. (a Florida corporation) as of December 31, 1993 and 1994, and
the related statements of operations and retained earnings and cash flows for
the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Whittle, Varnell and Bedoya,
P.A. as of December 31, 1993 and 1994, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
September 20, 1995.
F-164
<PAGE>
WHITTLE, VARNELL AND BEDOYA, P.A.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
September 30,
1993 1994 1995
----------- ----------- -----------------
ASSETS (Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 17,490 $ 85,098 $ 69,858
Accounts receivable, net of allowances of $149,344
in 1993, $185,381 in 1994 and $188,590 (unaudited)
in 1995 271,889 337,497 350,240
Prepaid expenses 6,872 9,680 --
-------- -------- --------
Total current assets 296,251 432,275 420,098
PROPERTY AND EQUIPMENT, net 132,501 112,996 144,792
DUE FROM STOCKHOLDER 8,020 6,762 8,405
OTHER ASSETS 8,317 8,317 8,114
-------- -------- --------
Total assets $445,089 $560,350 $581,409
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 78,982 $151,973 $ 78,058
Deferred income taxes 63,400 82,000 115,000
Revolving line of credit 44,468 35,349 27,455
Current portion of long-term debt 20,382 22,205 26,000
-------- -------- --------
Total current liabilities 207,232 291,527 246,513
LONG-TERM DEBT, net of current portion 69,078 46,873 27,884
-------- -------- --------
Total liabilities 276,310 338,400 274,397
-------- -------- --------
COMMITMENTS AND CONTINGENCIES
(Notes 7, 8 and 10)
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 1,000 shares authorized,
300 shares issued and outstanding 300 300 300
Additional paid-in capital 7,200 7,200 7,200
Retained earnings 161,279 214,450 299,512
-------- -------- --------
Total stockholders' equity 168,779 221,950 307,012
-------- -------- --------
Total liabilities and stockholders' equity $445,089 $560,350 $581,409
======== ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-165
<PAGE>
WHITTLE, VARNELL AND BEDOYA, P.A.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
For the Nine-Month
For the Years Ended Periods
December 31, Ended September 30,
---------------------- ------------------------
1993 1994 1994 1995
--------- --------- --------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
NET PATIENT REVENUE $1,814,696 $2,514,824 $1,882,415 $1,980,965
---------- ---------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Salaries and benefits 1,153,467 1,437,648 1,069,520 1,232,025
Physician stockholders' payroll in excess
of base salary 286,103 513,159 286,136 323,577
Direct facility expenses 299,416 339,182 320,581 246,016
Provision for bad debts 119,475 148,305 81,846 40,285
---------- ---------- ---------- ----------
Total operating costs and expenses 1,858,461 2,438,294 1,758,083 1,841,903
---------- ---------- ---------- ----------
Operating (loss) income (43,765) 76,530 124,332 139,062
OTHER INCOME 6,502 10,741 -- --
---------- ---------- ---------- ----------
(Loss) income before provision for
income taxes (37,263) 87,271 124,332 139,062
PROVISION FOR INCOME TAXES -- 34,100 48,000 54,000
---------- ---------- ---------- ----------
Net (loss) income (37,263) 53,171 76,332 85,062
RETAINED EARNINGS, beginning of year 198,542 161,279 161,279 214,450
---------- ---------- ---------- ----------
RETAINED EARNINGS, end of year $ 161,279 $ 214,450 $ 237,611 $ 299,512
========== ========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-166
<PAGE>
WHITTLE, VARNELL AND BEDOYA, P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended Nine-Month Periods
December 31, Ended September 30,
-------------------- --------------------
1993 1994 1994 1995
-------- -------- ------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (37,263) $ 53,171 $ 76,332 $ 85,062
--------- --------- -------- --------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 44,142 47,845 23,500 33,999
Provision for bad debts 119,475 148,305 81,846 40,285
Deferred tax provision -- 18,600 63,600 33,000
Changes in assets and liabilities:
Accounts receivable (97,874) (213,913) (35,710) (53,028)
Prepaid expenses 176 (2,808) (68,700) 9,680
Other assets 7,223 -- (16) 203
Accounts payable and accrued
expenses (76,045) 72,991 (71,482) (73,915)
--------- --------- -------- --------
Total adjustments (2,903) 71,020 (6,962) (9,776)
--------- --------- -------- --------
Net cash (used in) provided by
operating activities (40,166) 124,191 69,370 75,286
--------- --------- -------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (99,294) (28,340) (8,646) (62,509)
Due from stockholder (8,020) 1,258 759 (1,643)
--------- --------- -------- --------
Net cash used in investing activities (107,314) (27,082) (7,887) (64,152)
--------- --------- -------- --------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Borrowings on revolving line of credit 18,507 -- -- --
Payments on revolving line of credit -- (9,119) (5,140) (7,894)
Borrowings on long-term debt 43,753 -- -- --
Payments on long-term debt -- (20,382) (12,446) (18,480)
--------- --------- -------- --------
Net cash provided by (used in)
financing activities 62,260 (29,501) (17,586) (26,374)
--------- --------- -------- --------
Net (decrease) increase in cash and
cash equivalents (85,220) 67,608 43,897 (15,240)
CASH AND CASH EQUIVALENTS,
beginning of year 102,710 17,490 17,490 85,098
--------- --------- -------- --------
CASH AND CASH EQUIVALENTS,
end of year $ 17,490 $ 85,098 $ 61,387 $ 69,858
--------- --------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 12,623 $ 12,606 $ 54 $ 7,342
--------- --------- -------- --------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-167
<PAGE>
WHITTLE, VARNELL AND BEDOYA, P.A.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Business
Whittle, Varnell and Bedoya, P.A. (the "Company") is a Florida corporation
organized on December 31, 1989, to provide medical cardiology services. The
Company operates in area hospitals and maintains one office in Palm Beach
County and another in Martin County.
b. Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at the date of purchase to be cash
equivalents. Included in the cash and cash equivalents balance as of December
31, 1993 and 1994, and September 30, 1995, are interest-bearing deposits
$2,306, $2,214 and $43,367 (unaudited), respectively.
c. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Property and equipment are depreciated using accelerated methods over the
estimated useful lives of the assets ranging from five to seven years.
d. Accounts Receivable and Revenues
Accounts receivable are primarily amounts due under fee-for-service
contracts from third-party payors such as insurance companies (50%), patients
(5%) and government-sponsored health care programs (40%). These receivables
are presented net of an estimated allowance for contractual adjustments and
uncollectible receivables. Contractual adjustments result from the difference
between the rates for services performed and reimbursement amounts from the
government-sponsored health care programs and insurance companies for such
services.
e. Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes," which requires that deferred income taxes be recognized for
the tax consequences in future years of differences between the tax basis of
assets and liabilities and their financial reporting basis at rates based on
enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income.
f. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of the fair value
of certain financial instruments. Cash and cash equivalents, accounts
receivable, prepaid expenses, other assets, accounts payable and accrued
expenses and long-term debt are reflected in the accompanying financial
statements at cost which approximates fair value.
g. Interim Financial Data
In the opinion of the management of the Company, the accompanying
unaudited combined financial statements contain all adjustments (consisting
of only normal recurring adjustments) necessary to present fairly the
financial position of the Company as of September 30, 1995, and the results
of operations for the nine-month periods ended September 30, 1994 and 1995.
The results of operations and cash flows for the nine-month period ended
September 30, 1995 are not necessarily indicative of the results of
operations or cash flows which may be reported for the remainder of 1995.
F-168
<PAGE>
WHITTLE, VARNELL AND BEDOYA, P.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
September 30,
1993 1994 1995
-------- -------- ----------
(Unaudited)
<S> <C> <C> <C>
Furniture, fixtures and equipment $ 348,350 $ 360,680 $ 379,536
Leasehold improvements 9,061 8,561 16,955
--------- --------- ---------
357,411 369,241 396,491
Less: Accumulated depreciation (224,910) (256,245) (251,699)
--------- --------- ---------
$ 132,501 $ 112,996 $ 144,792
========= ========= =========
</TABLE>
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------- September 30,
1993 1994 1995
------ ------- -------------
(Unaudited)
<S> <C> <C> <C>
Accounts payable $ -- $ 11,203 $17,058
Accrued payroll taxes 20,081 80,834 --
Accrued pension expenses 58,901 44,436 40,000
Income tax payable -- 15,500 21,000
------- -------- -------
$78,982 $151,973 $78,058
======= ======== =======
</TABLE>
4. REVOLVING LINE OF CREDIT
The revolving line of credit bears interest at 8.5%, is unsecured and has
no specified repayment terms. The amount available to borrow against the line
of credit is approximately $65,000 at December 31, 1994 and $73,000
(unaudited) at September 30, 1995.
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------ September 30,
1993 1994 1995
------- ------- -------------
(Unaudited)
<S> <C> <C>
Capital lease obligation, bearing interest at 15%,
payable in monthly installments of $1,326 through July
1997 $ 46,530 $ 35,748 $ 26,100
Notes payable, bearing interest between 8% and 18%,
payable in average monthly installments of
approximately $1,100 through March 1998 42,930 33,330 27,784
-------- -------- --------
89,460 69,078 53,884
Less--Current portion (20,382) (22,205) (26,000)
-------- -------- --------
$ 69,078 $ 46,873 $ 27,884
======== ======== ========
</TABLE>
F-169
<PAGE>
WHITTLE, VARNELL AND BEDOYA, P.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Future maturities of long-term debt as of December 31, 1994 are as
follows:
<TABLE>
<CAPTION>
Capital Note
Year Leases Payable Total
---- ---------- ---------- ------------
<S> <C> <C> <C>
1995 $15,913 $ 9,105 $25,018
1996 15,913 10,083 25,996
1997 9,282 11,168 20,450
1998 -- 2,974 2,974
------- ------- -------
$41,108 $33,330 74,438
======= =======
Less: Amount representing interest (5,360)
-------
$69,078
=======
</TABLE>
6. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
For the
For the Year Ended Nine-Month Periods
December 31, Ended September 30,
----------------------- ---------------------------
1993 1994 1994 1995
--------- ---------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Current $ -- $15,500 $(15,600) $21,000
Deferred -- 18,600 63,600 33,000
------- ------- -------- -------
$ -- $34,100 $ 48,000 $54,000
------- ------- -------- -------
Federal $ -- $29,700 $ 42,000 $47,000
State -- 4,400 6,000 7,000
------- ------- -------- -------
$ -- $34,100 $ 48,000 $54,000
======= ======= ======== =======
</TABLE>
A reconciliation of the tax provision at the statutory rate of 34% to the
effective tax rate is as follows:
<TABLE>
<CAPTION>
For the
Nine-Month Periods
For the Year Ended Ended September
December 31, 30,
------------------ ------------------
1993 1994 1994 1995
-------- ------ ------ --------
(Unaudited)
<S> <C> <C> <C> <C>
Tax provision at the
statutory rate $(12,700) $29,700 $42,000 $47,000
State income taxes (1,900) 4,400 6,000 7,000
Net operating loss carried
forward 14,600 -- -- --
-------- ------- ------- -------
$ -- $34,100 $48,000 $54,000
======== ======= ======= =======
</TABLE>
F-170
<PAGE>
WHITTLE, VARNELL AND BEDOYA, P.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred income taxes consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------
September 30,
1993 1994 1995
------- ------- -------------
(Unaudited)
<S> <C> <C> <C>
Book/tax differences in recording accounts
receivable $106,000 $132,000 $137,000
Book/tax difference in recording prepaid
expenses 3,000 3,000 --
Book/tax difference in recording accounts
payable and accrued expenses (31,000) (53,000) (22,000)
Net operating loss carried forward (14,600) -- --
-------- -------- --------
$ 63,400 $ 82,000 $115,000
======== ======== ========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
a. Employment Agreements
The Company has an employment agreement with a physician. Future minimum
payments under this agreement as of December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Year Amount
- ----- ---------
<S> <C>
1995 $150,000
1996 87,500
--------
$237,500
========
</TABLE>
b. Insurance
The physicians employed by the Company are required to maintain insurance
coverage for their professional malpractice claims as a condition of
employment. Such insurance provides for coverage to the extent individual
claims do not exceed $1,000,000 per incident and $3,000,000 in the aggregate
per year. The Company maintains occurrence-based malpractice insurance
coverage. Accordingly, the Company does not provide reserves for professional
malpractice claims.
c. Operating Leases
The Company leases automobiles for the stockholders and office space under
operating leases which expire through 1998. Future annual minimum payments
under operating leases as of December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Year Amount
- ----- --------
<S> <C>
1995 $ 88,004
1996 81,910
1997 65,332
1998 21,333
--------
$256,579
========
</TABLE>
Rent expense of $54,956, $64,849, $42,846 (unaudited) and $47,219
(unaudited) was incurred in the years ended December 31, 1993 and 1994 and
the nine-month periods ended September 30, 1994 and 1995, respectively.
F-171
<PAGE>
WHITTLE, VARNELL AND BEDOYA, P.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. BENEFIT PLAN
The Company provides retirement benefits for substantially all of its
employees under a defined contribution plan. Contributions to the plan
amounted to $70,797 and $94,445 for the years ended December 31, 1993 and
1994, respectively, and $62,000 (unaudited) and $80,763 (unaudited) for the
nine-month periods ended September 30, 1994 and 1995, respectively.
9. RELATED PARTY TRANSACTIONS
"Due from Stockholder" in the accompanying balance sheet at December 31,
1993 and 1994 consists of an advance to a physician stockholder. The amount
is noninterest-bearing and has no specified repayment terms.
10. SUBSEQUENT EVENTS
Subsequent to year-end, the Company began negotiations to enter into an
asset purchase and long-term management service agreement with Continuum Care
Corporation, an unaffiliated entity. As of September 20, 1995, the terms of
this agreement had not been finalized.
F-172
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Pinnacle Associates, Inc.:
We have audited the accompanying consolidated balance sheets of Pinnacle
Associates, Inc. as of December 31, 1994 and 1993, and the related
consolidated statements of operations, changes in stockholders' deficit and
cash flows for the year ended December 31, 1994 and for the period from
October 21 (inception) to December 31, 1993. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pinnacle
Associates, Inc. as of December 31, 1994 and 1993 and the consolidated
results of its operations and its cash flows for the year ended December 31,
1994 and for the period from October 21 (inception) to December 31, 1993 in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
December 14, 1995
See Independent Audit Report.
F-173
<PAGE>
PINNACLE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31, December 31,
1995 1994 1993
--------------- -------------- ----------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $ 13,940 $ 7,666 $ 1,174
Trade accounts receivable, less allowance for
doubtful accounts of $3,358 in 1994 and $0 in 1993 567,127 75,019 --
Inventory 45,181 50,718 --
Prepaid expenses 5,586 -- --
Other assets 7,113 13,762 5,285
---------- --------- --------
Total current assets 638,947 147,165 6,459
Property and equipment, net of accumulated
depreciation 73,114 92,924 10,716
Organization costs, net amortization 3,500 4,250 --
---------- --------- --------
Total assets. $ 715,561 $ 244,339 $ 17,175
========== ========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable 233,729 71,029 --
Accrued liabilities 75,561 30,655 --
Interest payable 7,712 4,718 --
Line of credit 400,000 400,000 30,000
Note payable 50,000 50,000 --
Loan payable to officers 250,000 318 32,095
---------- --------- --------
Total current liabilities 1,017,002 556,720 62,095
Commitments and contingencies (Note 4) -- -- --
Stockholders' deficit:
Common stock, $.01 par 20,000,000; shares authorized;
issued and outstanding, 6,622,500 shares at
September 30, 1995, 6,457,500 shares at December
31, 1994 and 9,000,000 shares at December 31, 1993 66,225 65,475 90,000
Due to from stockholders (59,400) (59,400) (89,100)
Additional paid-in capital 616,275 542,025 --
Accumulated deficit (924,541) (860,481) (45,820)
---------- --------- --------
Total stockholders' deficit. (301,411) (312,381) (44,920)
---------- --------- --------
Total liabilities and stockholders' deficit $ 715,561 $ 244,339 $ 17,175
========== ========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
See Independent Audit Report.
F-174
<PAGE>
PINNACLE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
October 21,
January 1, to January 1, to (inception) to
September 30, December 31, December 31,
1995 1994 1993
--------------- --------------- ----------------
(Unaudited)
<S> <C> <C> <C>
Operating revenues $1,206,832 $ 303,508 $ --
Costs and expenses:
Operating expenses 484,130 134,636
General and administrative expenses 841,804 953,915 45,820
---------- ---------- --------
Total costs and expenses 1,325,934 1,088,551 45,820
---------- ---------- --------
(119,102) (785,043) (45,820)
---------- ---------- --------
Other income (expense):
Interest expense (36,871) (19,280) --
Interest income -- 1,166 --
Loss on equity investment -- (12,500) --
Proceeds from sale of investment 12,500 -- --
Other income, net 79,413 996 --
---------- ---------- --------
Net loss $ (64,060) $ (814,661) $(45,820)
========== ========== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
See Independent Audit Report.
F-175
<PAGE>
PINNACLE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock
--------------------- Additional Total
Due from Paid-In Accumulated Stockholders'
Shares Amount Stockholders Capital Deficit Deficit
---------- ------- ----------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 21, 1993
Issuance of common stock 9,000,000 $ 90,000 $(89,100) $ -- $ 900
Net loss $ (45,820) (45,820)
---------- -------- -------- -------- --------- ---------
Balance, December 31, 1993 9,000,000 90,000 (89,100) -- (45,820) (44,920)
Issuance of common stock 597,500 5,975 591,525 597,500
Retirement of common stock (3,000,000) (30,000) 29,700 -- (300)
Repurchase of common stock (50,000) (500) (49,500) (50,000)
Net loss (814,661) (814,661)
---------- -------- -------- -------- --------- ---------
Balance, December 31, 1994 6,547,500 65,475 (59,400) 542,025 (860,481) (312,381)
Issuance of common stock 75,000 750 74,250 75,000
Net loss (64,060) (64,060)
---------- -------- -------- -------- --------- ---------
Balance, September 30,
1995 (unaudited) 6,622,500 $ 66,225 $(59,400) $616,275 $(924,541) $(301,441)
========== ======== ======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
See Independent Audit Report.
F-176
<PAGE>
PINNACLE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
October 21,
January 1, to January 1, to (inception) to
September 30, December 31, December 31,
1995 1994 1993
--------------- --------------- ----------------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (64,060) $(814,661) $(45,820)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 25,969 22,702 290
Loss on sale of fixed assets (423)
Change in assets and liabilities:
(Increase) in trade accounts receivable (492,108) (75,019) --
(Increase) decrease in inventory 5,537 (50,718) --
(Increase) decrease in prepaid expenses and
organization costs 1,063 (13,478) (5,285)
Increase (decrease) in accounts payable 162,700 71,029 --
Increase (decrease) in accrued expenses 44,906 30,655 --
Increase (decrease) in accrued interest 2,994 4,718 --
--------- --------- --------
Net cash used in operating activities (312,999) (825,195) (50,815)
Cash flows used in investing activities:
Additions to property and equipment (5,409) (106,196) (11,006)
Proceeds from sale of fixed assets -- 2,462 --
Net cash provided (used by investing
activities) (5,409) (103,736) (11,006)
--------- --------- --------
Cash flows provided by financing activities:
Proceeds from issuance of common stock 75,000 547,200 900
Borrowings from officers 249,682 318 32,095
Borrowings under notes payable -- 50,000 --
Payments on loans to officers -- (32,095) --
Borrowings on revolving line of credit -- 370,000 30,000
--------- --------- --------
Net cash provided (used by financing
activities) 324,682 935,423 62,995
--------- --------- --------
Net change in cash 6,274 6,492 1,174
Cash, beginning of period. 7,666 1,174 --
--------- --------- --------
Cash, end of period $ 13,940 $ 7,666 $ 1,174
========= ========= ========
Supplemental cash flow information:
Cash paid during the year for interest $ 33,876 19,280 --
========= ========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
See Independent Audit Report.
F-177
<PAGE>
PINNACLE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies:
Description of Business
Pinnacle Associates Inc. (the "Company") was incorporated on October 21,
1993 under the laws of Georgia and began treating patients in April 1994. The
Company was formed to provide management and administrative services for
physicians as well as physician directed infusion therapy programs for the
physician's patients while remaining part of the physician's practice. The
Company offers services in Pittsburgh and Atlanta.
Principles of Consolidation
The consolidated financial statements include the accounts of Pinnacle
Associates, Inc. and its related entities. All intercompany transactions and
balances have been eliminated in consolidation.
Inventory
Inventory is stated at the lower of cost, as determined on the first-in
first-out method, or market.
Investments
The equity method of accounting is used for investments when the Company
has a non-controlling ownership interest in another company that is greater
than 20%. Under the equity method of accounting, original investments are
recorded at cost and adjusted by the company's share of undistributed
earnings or losses of such companies and the amortization of underlying
intangibles.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is generally calculated over the estimated useful lives of the
assets using accelerated methods. Routine maintenance and repairs are charged
to expenses as incurred, while costs of betterments and renewals are
capitalized.
Organization Costs
Organization costs are being amortized on a straight-line basis over a
five year period.
Income Taxes
The stockholder of the Company has elected to adopt the provisions of
Subchapter S of the Internal Revenue Code of 1986. As a result, the Company
is not subject to corporate income taxes, except for taxes on capital gains,
if any. Accordingly, no provisions have been made in the accompanying
financial statements for federal and state income taxes since such taxes are
liabilities of the individual stockholder and the amounts thereof depend upon
his tax situation.
The Company's tax returns are subject to examination by federal and state
taxing authorities. In the event of an examination of such tax returns, the
liability of the stockholder could be changed if adjustments in the
distributable income were ultimately sustained by the taxing authorities.
See Independent Audit Report.
F-178
<PAGE>
PINNACLE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Property and Equipment:
<TABLE>
<CAPTION>
December 31,
-------------------------
Depreciable
Lives 1994 1993
----------------- ----------- -----------
<S> <C> <C> <C>
Furniture and equipment 5-7 years $ 45,949 $ 8,073
Computer and software. 5-7 years 68,619 2,933
-------- -------
114,568 11,006
Less accumulated depreciation (21,644) (290)
-------- -------
Total $ 92,924 $10,716
======== =======
</TABLE>
3. Line of Credit:
On November 24, 1993 the Company obtained a line of credit from a bank in
the amount of $200,000 which is due and payable on demand. On June 14, 1994,
the Company obtained an additional $200,000 line of credit with the same
payment terms. Interest is payable monthly for each line of credit at the
bank's variable prime rate which was 8.5% at December 31, 1994. The amount
outstanding under the line of credit at December 31, 1994 and 1993 was
$400,000 and $30,000, respectively. A former partner and officer of the
Company has personally guaranteed the line of credit.
4. Commitments and Contingencies:
The Company leases various facilities, equipment and vehicles under lease
arrangements. Rent expense under all operating leases was $62,338 and $10,016
at December 31, 1994 and 1993, respectively. Future minimum lease payments
under these leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
1995 $ 39,739
1996 40,886
1997 33,008
1998 33,040
1999 5,538
Thereafter --
--------
Total minimum lease
payments $152,211
========
</TABLE>
5. Related Party Transactions:
The Company issued a $50,000 note which is payable on demand to a former
stockholder of the Company at 8% interest. Since the Company's inception,
several of the Company's officers and shareholders have provided services to
the Company for which no compensation has been reflected on these financial
statements.
6. Investment:
During 1994, the Company had purchased for $12,500 a 50% investment in an
affiliated company owned by certain stockholders of the Company. The
Company's share of the losses of the investment for 1994 exceeded the
carrying value of the investment. This investment was accounted for using the
equity method. At December 31, 1994, the investment balance was written down
to zero, reflecting the adjusted basis of the investment. Subsequent to
December 31, 1994, the equity investment was sold for $12,500 to a former
stockholder and officer of the Company.
See Independent Audit Report.
F-179
<PAGE>
PINNACLE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Subsequent Events:
As of November 30, 1995, the Company opened several new programs in
seventeen locations, increasing the total number of program locations to nine
cities from two cities at December 31, 1994.
During November, the Company was acquired by Continuum Care Corporation.
In connection with the acquisition, the Company may receive up to $5,200,000.
The payment will represent the full purchase price and will be made in the
form of shares of Common Stock of Continuum Care Corporation. The ultimate
purchase price will be allocated to assets, primarily goodwill, at their fair
market value and amortized prospectively over the remainder of the forty year
period.
See Independent Audit Report.
F-180
<PAGE>
<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 *
Printing and Engraving Expenses *
Legal Fees and Expenses *
Accounting Fees and Expenses *
Blue Sky Fees and Expenses *
Miscellaneous *
-------
TOTAL *
=======
__________
* 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
II-1
<PAGE>
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.
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 Common
Name 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
II-2
<PAGE>
The Debentures offered pursuant to this Registration Statement were
initially issued by the Company on June 26, 1996, to the following Initial
Purchasers:
Name Principal 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-3
<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 Form of Indenture.
*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 Promissory Note dated March 2, 1995 by Radiation Care, Inc. and its subsidiaries to
FINOVA Capital Corporation
10.11 Security Agreement dated March 2, 1995 by and between Radiation Care, Inc. and its
subsidiaries and FINOVA Capital Corporation
10.12 Employment Agreement dated as of January 1, 1995 between DASCO and Bruce A. Rendina
10.13 Employment Agreement dated as of January 1, 1995 between DASCO and Donald A. Sands
+10.14 Employment Agreement dated July 27, 1994 between Continuum Care of Massachusetts,
Inc. and William A. Sanger
+10.15 First Amendment to Employment Agreement dated March 13, 1996 between PhyMatrix
Corp. and William A. Sanger
+10.16 Employment Agreement dated January 29, 1996 between PhyMatrix Corp. and Robert A.
Miller
10.17 Employment Agreement dated September 22, 1994 between Continuum Care of
Massachusetts, Inc. and Edward E. Goldman, M.D.
10.19 1995 Equity Incentive Plan
II-4
<PAGE>
10.20 Registration Agreement dated January 29, 1996 between PhyMatrix Corp. and various
stockholders of PhyMatrix Corp.
+10.21 Registration Agreement dated June 21, 1996, between PhyMatrix Corp. and the Initial
Purchasers
10.22 Shareholders' Agreement dated as of May 31, 1995 by and among Donald A. Sands,
Bruce A. Rendina, Abraham D. Gosman, DASCO Development Corporation and DASCO
Development West, Inc.
21.1 Subsidiaries of the registrant
*23.1 Consent of Coopers & Lybrand L.L.P.
*23.2 Consent of Coopers & Lybrand L.L.P.
*23.3 Consent of Bober, Markey & Company
*23.4 Consent of Coopers & Lybrand L.L.P.
*23.5 Consent of Coopers & Lybrand L.L.P.
*23.6 Consent of Arthur Andersen LLP
*23.7 Consent of Hoyman, Dobson & Company
*23.8 Consent of Babush, Neiman, Kornman & Johnson
*23.9 Consent of Weil, Akman, Baylin & Coleman
*23.10 Consent of Coopers & Lybrand L.L.P.
*23.11 Consent of Katz, Sapper & Miller, LLP
*23.12 Consent of Roy Cline, CPA, PA
*23.13 Consent of Regan, Russell, Schickner & Shah, P.A.
*23.14 Consent of Patrick & Associates, P.A.
*23.15 Consent of Patrick & Associates, P.A.
*23.16 Consent of Coopers & Lybrand L.L.P.
*23.17 Consent of Nutter, McClennen & Fish, LLP (contained in Exhibit 5)
</TABLE>
_________________________
* Filed herewith.
+ To be filed by amendment.
All other exhibits are hereby incorporated by reference to the
Company's Registration Statement on Form S-1 (Registration No. 33-97854).
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:
II-5
<PAGE>
(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-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 17th day of
July 1996.
PHYMATRIX CORP.
By: /s/ Abraham D. Gosman
-------------------------------------
Abraham D. Gosman
Chairman of the Board of Directors,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
/s/ Abraham D. Gosman July 17, 1996
- -----------------------------------------------
Abraham D. Gosman
Chairman of the Board of Directors, President
and Chief Executive Officer
(Principal Executive Officer)
/s/ Frederick R. Leathers July 17, 1996
- ------------------------------------------------
Frederick R. Leathers
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Joseph N. Cassesse July 17, 1996
- ------------------------------------------------
Joseph N. Cassese
Director
/s/ David Livingston June 28, 1996
- ------------------------------------------------
David Livingston, M.D.
Director
<PAGE>
- ------------------------------------------------ July 17, 1996
Bruce Rendina
Director
- ------------------------------------------------ July 17, 1996
Stephen E. Ronai, Esq.
Director
Hugh L. Carey July 17, 1996
- ------------------------------------------------
Governor Hugh L. Carey
Director
John T. Chay June 18, 1996
- ------------------------------------------------
John T. Chay
Director
EXHIBIT 5.1
NUTTER, McCLENNEN & FISH, LLP
ATTORNEYS AT LAW
ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02110-2699
TELEPHONE: 617-439-2000 FACSIMILE: 617-973-9748
CAPE COD OFFICE DIRECT DIAL NUMBER
HYANNIS, MASSACHUSETTS (617) 439 - 2623
July 17, 1996
PhyMatrix Corp.
777 South Flagler Drive
West Palm Beach, FL 33401
Gentlemen:
Reference is made to that certain Registration Statement on Form S-1
(the "Registration Statement"), which PhyMatrix Corp., a Delaware corporation
(the "Company"), is filing on the date hereof with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the resale of up to $100,000,000 aggregate principal amount of
the Company's 6 3/4% Convertible Subordinated Debentures due 2003 (the
"Debentures") by the holders thereof, and the resale of up to 3,546,099 shares
of the Company's Common Stock, $.01 par value per share (the "Shares"), issuable
upon the conversion of the Debentures by holders of Debentures who did not
purchase such Debentures pursuant to the Registration Statement.
We have acted as counsel for the Company in connection with the
Registration Statement. We have examined original or certified copies of the
Restated Certificate of Incorporation of the Company, the Company's By-laws, the
Indenture under which the Debentures were issued, the corporate records of the
Company to the date hereof, certificates of public officials and such other
documents, records and materials as we have deemed necessary in connection with
this opinion letter. Based upon the foregoing, and in reliance upon information
from time to time furnished to us by the Company's officers, directors and
agents, we are of the opinion that: (i) the Debentures constitute binding
obligations of the Company to the holders thereof; and (ii) the shares of Common
Stock to be issued by the Company from time to time upon the conversion of
Debentures, when issued under the terms of said Indenture, will be duly and
validly issued, fully paid and non-assessable.
We understand that this opinion letter is to be used in connection with
the Registration Statement, as finally amended, and hereby consent to the filing
of this opinion letter with and as a part of the Registration Statement as so
amended, and to the reference to our firm in the
<PAGE>
NUTTER, MCCLENNEN & FISH, LLP
PhyMatrix Corp.
July 17, 1996
Page 2
Prospectus under the heading "Legal Matters." It is understood that this opinion
letter is to be used in connection with the resale of the aforesaid Debentures
and shares of Common Stock only while the Registration Statement is effective
and as it may be amended from time to time as contemplated by Section 10(a)(3)
of the Securities Act.
Very truly yours,
/s/ Nutter, McClennen & Fish, LLP
NUTTER, McCLENNEN & FISH, LLP
JED/MRD
267650_1.WP6
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement of PhyMatrix Corp. on
Form S-1 (File No. ) of our report dated March 27, 1996, on our audits of the
combined financial statements and financial statement schedule of PhyMatrix
Corp. we also consent to the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
July 15, 1996
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
PhyMatrix Corp. on Form S-1 (File No. 33- ) of our report dated November 6,
1995, on our audits of the financial statements of DASCO Development Corporation
and Affiliate. We also consent to the reference to our firm under the caption
"Experts."
/s/ Coopers & Lybrand L.L.P.
Miami, Florida
July 15, 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 incorporation by reference of
our report dated July 31, 1995 with respect to DASCO Development Corporation and
Affiliate in this Registration Statement on Form S-1 filed by PhyMatrix Corp.,
which report is incorporated by reference in this Registration Statement.
/s/ Bober, Markey & Company
BOBER, MARKEY & COMPANY
Akron, Ohio
July 12, 1996
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
PhyMatrix Corp. on Form S-1 (File No. 33- ) of our report dated October 5,
1995, on our audits of the financial statements of Radiation Care, Inc. and
Subsidiaries. We also consent to the reference to our firm under the caption
"Experts."
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
July 15, 1996
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement on
Form S-1 (File No. ) of our report dated August 24, 1995, on our audits of the
financial statements of Aegis Health Systems, Inc. as of December 31, 1994, and
1993, and for each of the three years in the period ended December 31, 1994,
which report is included in the Registration Statement on Form S-1 (File No. )
dated June 28, 1996 of PhyMatrix Corp.
/s/ Coopers & Lybrand L.L.P.
Oklahoma City, Oklahoma
July 11, 1996
EXHIBIT 23.6
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
West Palm Beach, Florida,
July 11, 1996.
EXHIBIT 23.7
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1 (File No.
33- ) 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
July 11, 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 incorporation by
reference of our report dated June 26, 1995 with respect to Georgia
Oncology-Hematology Clinic, P.C. in this Registration Statement on Form S-1
filed by PhyMatrix Corp., which report is incorporated by reference on this
Registration Statement.
/s/ Babush, Neiman, Kornman & Johnson, LLP
Babush, Neiman, Kornman & Johnson, LLP
July 11, 1996
Atlanta, Georgia
EXHIBIT 23.9
(410) 561-4411 FAX: (410) 561-4586
WABC
WEIL, AKMAN, BAYLIN & COLEMAN, P.A.
CERTIFIED PUBLIC ACCOUNTANTS
201 West Padonia Road, Suite 600
Timonium, Maryland 21093-2186
INDEPENDENT AUDITOR'S CONSENT
As independent auditors, we hereby consent to the incorporation by
reference of our report dated August 4, 1995 with respect to Oncology-Hematology
Associates, P.A. and Oncology-Hematology Infusion Therapy, Inc. in this
Registration Statement on Form S-1 filed by PhyMatrix Corp., which report is
incorporated by reference in this Registration Statement.
/s/ Weil, Akman, Baylin & Coleman, P.A.
WEIL, AKMAN, BAYLIN & COLEMAN, P.A.
Timonium, Maryland
July 11, 1996
EXHIBIT 23.10
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
PhyMatrix Corp. on Form S-1 (File No. 33- ) of our report dated January 9, 1996,
on our audit of the financial statements of Cancer Specialists of Georgia, P.C.
We also consent to the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
July 15, 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
July 12, 1996
EXHIBIT 23.12
INDEPENDENT AUDITORS' CONSENT
As independent auditors, we hereby consent to the incorporation by
reference of our report dated June 22, 1995 with respect to UroMed Technologies,
Inc. in this Registration Statement on Form S-1 filed by PhyMatrix Corp., which
report is incorporated by reference in this Registration Statement.
/s/ Roy Cline, CPA
Roy Cline, CPA, PA
Altamonte Springs, Florida
July 11, 1996
EXHIBIT 23.13
REGAN, RUSSELL, SCHICKNER & SHAH, P.A.
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' CONSENT
As independent auditors, we hereby consent to the incorporation by
reference of our report dated September 13, 1995 with respect to the Financial
Statements of Nutrichem, Inc. for periods ended December 31, 1993 and November
17, 1994 in this Registration Statement on Form S-1 filed by PhyMatrix
Corporation.
/s/ Regan, Russell, Schickner & Shah, P.A.
Regan, Russell, Schickner & Shah, P.A.
Columbia, Maryland
July 11, 1996
EXHIBIT 23.14
4040 Woodcock Drive, Suite 230
Patrick & Jacksonville, Florida 32207
Associates, P.A. (904)396-9510 o (904)396-5400 o fax (904)396-9226
Certified Public Accountants
INDEPENDENT AUDITORS' CONSENT
As independent auditors, we hereby consent to the incorporation by
reference of our report dated June 8, 1995, with respect to First Choice Home
Care, Inc. in this Registration Statement on Form S-1 filed by PhyMatrix Corp.,
which report is incorporated by reference in this Registration Statement.
/s/ Patrick & Associates, P.A.
Patrick & Associates, P.A.
Jacksonville, Florida
July 11, 1996
EXHIBIT 23.15
4040 Woodcock Drive, Suite 230
Patrick & Jacksonville, Florida 32207
Associates, P.A. (904)396-9510 o (904)396-5400 o fax (904)396-9226
Certified Public Accountants
INDEPENDENT AUDITORS' CONSENT
As independent auditors, we hereby consent to the incorporation by
reference of our report dated June 8, 1995, with respect to First Choice Health
Care Services of Ft. Lauderdale, Inc. in this Registration Statement on Form S-1
filed by PhyMatrix Corp., which report is incorporated by reference in this
Registration Statement.
/s/ Patrick & Associates, P.A.
Patrick & Associates, P.A.
Jacksonville, Florida
July 11, 1996
EXHIBIT 23.16
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
PhyMatrix Corp. on Form S-1 (File No. 33- ) of our report dated December 14,
1995, on our audits of the financial statements of Pinnacle Associates, Inc. We
also consent to the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
July 15, 1996
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
-------------------------------------------
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
A TRUSTEE PURSUANT TO SECTION 305(b)(2) ________
----------------------------------------
CHEMICAL BANK
(Exact name of trustee as specified in its charter)
New York 13-4994650
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)
270 Park Avenue
New York, New York 10017
(Address of principal executive offices) (Zip Code)
William H. McDavid
General Counsel
270 Park Avenue
New York, New York 10017
Tel: (212) 270-2611
(Name, address and telephone number of agent for service)
---------------------------------------------
PhyMatrix Corp
(Exact name of obligor as specified in its charter)
Delaware 65-0617076
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
777 South Flagler Drive
West Palm Beach, Florida 32811
(Address of principal executive offices) (Zip Code)
-------------------------------------------
6 3/4% Convertible Subordinated Debentures due 2003
(Title of the indenture securities)
-----------------------------------------------------
<PAGE>
GENERAL
Item 1. General Information.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
New York State Banking Department, State House, Albany, New York
12110.
Board of Governors of the Federal Reserve System, Washington, D.C.,
20551
Federal Reserve Bank of New York, District No. 2, 33 Liberty Street,
New York, N.Y.
Federal Deposit Insurance Corporation, Washington, D.C., 20429.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
Item 2. Affiliations with the Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
Item 16. List of Exhibits
List below all exhibits filed as a part of this Statement of
Eligibility.
1. A copy of the Articles of Association of the Trustee as now in
effect, including the Organization Certificate and the Certificates of Amendment
dated February 17, 1969, August 31, 1977, December 31, 1980, September 9, 1982,
February 28, 1985 and December 2, 1991 (see Exhibit 1 to Form T-1 filed in
connection with Registration Statement No. 33-50010, which is incorporated by
reference).
2. A copy of the Certificate of Authority of the Trustee to Commence
Business (see Exhibit 2 to Form T-1 filed in connection with Registration
Statement No. 33-50010, which is incorporated by reference).
2
<PAGE>
3. None, authorization to exercise corporate trust powers being
contained in the documents identified above as Exhibits 1 and 2.
4. A copy of the existing By-Laws of the Trustee (see Exhibit 4 to Form
T-1 filed in connection with Registration Statement No. 33-84460, which is
incorporated by reference).
5. Not applicable.
6. The consent of the Trustee required by Section 321(b) of the Act
(see Exhibit 6 to Form T-1 filed in connection with Registration Statement No.
33-50010, which is incorporated by reference).
7. A copy of the latest report of condition of the Trustee, published
pursuant to law or the requirements of its supervising or examining authority.
8. Not applicable.
9. Not applicable.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the
Trustee, Chemical Bank, a corporation organized and existing under the laws of
the State of New York, has duly caused this statement of eligibility to be
signed on its behalf by the undersigned, thereunto duly authorized, all in the
City of New York and State of New York, on the 12th day of July, 1996.
CHEMICAL BANK
By _______________________________
Gregory P. Shea
Assistant Vice President
- 3 -
<PAGE>
Item 16. List of Exhibits
List below all exhibits filed as a part of this Statement of
Eligibility.
1. A copy of the Articles of Association of the Trustee as now in
effect, including the Organization Certificate and the Certificates of Amendment
dated February 17, 1969, August 31, 1977, December 31, 1980, September 9, 1982,
February 28, 1985 and December 2, 1991 (see Exhibit 1 to Form T-1 filed in
connection with Registration Statement No. 33-50010, which is incorporated by
reference).
2. A copy of the Certificate of Authority of the Trustee to Commence
Business (see Exhibit 2 to Form T-1 filed in connection with Registration
Statement No. 33-50010, which is incorporated by reference).
3. None, authorization to exercise corporate trust powers being
contained in the documents identified above as Exhibits 1 and 2.
4. A copy of the existing By-Laws of the Trustee (see Exhibit 4 to Form
T-1 filed in connection with Registration Statement No. 33-84460, which is
incorporated by reference).
5. Not applicable.
6. The consent of the Trustee required by Section 321(b) of the Act
(see Exhibit 6 to Form T-1 filed in connection with Registration Statement No.
33-50010, which is incorporated by reference).
7. A copy of the latest report of condition of the Trustee, published
pursuant to law or the requirements of its supervising or examining authority.
8. Not applicable.
9. Not applicable.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, Chemical Bank, a corporation organized and existing under the laws of
the State of New York, has
4
<PAGE>
duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City of New York and State of
New York, on the 12th day of July, 1996.
CHEMICAL BANK
By /s/ Gregory P. Shea
Gregory P. Shea
Assistant Vice President
- 5 -
<PAGE>
Exhibit 7 to Form T-1
Bank Call Notice
RESERVE DISTRICT NO. 2
CONSOLIDATED REPORT OF CONDITION OF
Chemical Bank
of 270 Park Avenue, New York, New York 10017
and Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System,
at the close of business March 31, 1996, in accordance with a
call made by the Federal Reserve Bank of this District pursuant to the
provisions of the Federal Reserve Act.
Dollar Amounts
ASSETS in Millions
Cash and balances due from depository institutions:
Noninterest-bearing balances and
currency and coin .................................... $ 3,391
Interest-bearing balances ............................ 2,075
Securities: ..............................................
Held to maturity securities .............................. 3,607
Available for sale securities ............................ 29,029
Federal Funds sold and securities purchased under
agreements to resell in domestic offices of the
bank and of its Edge and Agreement subsidiaries,
and in IBF's:
Federal funds sold ................................... 1,264
Securities purchased under agreements to resell ...... 354
Loans and lease financing receivables:
Loans and leases, net of unearned income ............. $73,216
Less: Allowance for loan and lease losses ............ 1,854
Less: Allocated transfer risk reserve ................ 104
------
Loans and leases, net of unearned income,
allowance, and reserve ............................... 71,258
Trading Assets ........................................... 25,919
Premises and fixed assets (including capitalized
leases) ............................................... 1,337
<PAGE>
Other real estate owned .................................. 30
Investments in unconsolidated subsidiaries and
associated companies ................................. 187
Customer's liability to this bank on acceptances
outstanding .......................................... 1,082
Intangible assets ........................................ 419
Other assets ............................................. 7,406
TOTAL ASSETS ............................................. $147,358
=========
LIABILITIES
Deposits
In domestic offices .................................. $45,786
Noninterest-bearing .................................. $14,972
Interest-bearing ..................................... 30,814
In foreign offices, Edge and Agreement subsidiaries,
and IBF's ............................................ 36,550
Noninterest-bearing .................................. $ 202
Interest-bearing ..................................... 36,348
Federal funds purchased and securities sold under agree-
ments to repurchase in domestic offices of the bank and
of its Edge and Agreement subsidiaries, and in IBF's
Federal funds purchased .............................. 11,412
Securities sold under agreements to repurchase ....... 2,444
Demand notes issued to the U.S. Treasury ................. 699
Trading liabilities ...................................... 19,998
Other Borrowed money:
With a remaining maturity of one year or less ........ 11,305
With a remaining maturity of more than one year .......... 130
Mortgage indebtedness and obligations under capitalized
leases ............................................... 13
Bank's liability on acceptances executed and outstanding . 1,089
Subordinated notes and debentures ........................ 3,411
Other liabilities ........................................ 6,778
TOTAL LIABILITIES ........................................ 139,615
EQUITY CAPITAL
Common stock ............................................. 620
Surplus .................................................. 4,664
2
<PAGE>
Undivided profits and capital reserves ................... 3,058
Net unrealized holding gains (Losses)
on available-for-sale securities ......................... (607)
Cumulative foreign currency translation adjustments ...... 8
TOTAL EQUITY CAPITAL ...................................... 7,743
------
TOTAL LIABILITIES, LIMITED-LIFE PREFERRED
STOCK AND EQUITY CAPITAL .............................. $147,358
==========
I, Joseph L. Sclafani, S.V.P. & Controller of the above-named bank, do hereby
declare that this Report of Condition has been prepared in conformance with the
instructions issued by the appropriate Federal regulatory authority and is true
to the best of my knowledge and belief.
JOSEPH L. SCLAFANI
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us, and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the appropriate Federal regulatory authority and is true and correct.
WALTER V. SHIPLEY )
EDWARD D. MILLER )DIRECTORS
THOMAS G. LABRECQUE )
- 3 -
