SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 15, 1997
PHYMATRIX CORP.
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(Exact name of registrant as specified in its charter)
Delaware 000-27568 65-0617076
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(State of incorporation (Commission (IRS Employer
or organization) File Number) Identification No.)
777 South Flagler Drive, Suite 1000E, West Palm Beach, Florida 33401
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(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (617) 433-1000
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N/A
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(Former name or former address, if changed since last report.)
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Item 2. Acquisition or Disposition of Assets
On October 15, 1997, PhyMatrix Corp., a Delaware corporation (the
"Company"), completed the acquisition of Clinical Studies, Ltd. ("CSL") pursuant
to the Amended and Restated Agreement and Plan of Merger (the "Merger
Agreement") dated as of July 15, 1997 by and among the Company, CSL, PhyMatrix
Acquisition I, Inc., a Delaware corporation ("PhyMatrix Acquisition"), Dr.
Michael Rothman, Dr. Walter Brown, Michael T. Heffernan and Ronald Phillips as
Trustee of The Alexander Rothman 1993 Qualified Sub-Chapter S Trust and as
Trustee of The Julie Rothman 1993 Qualified Sub-Chapter S Trust. Pursuant to the
Merger Agreement, PhyMatrix Acquisition, a wholly-owned subsidiary of PhyMatrix,
merged with and into CSL (the "Merger"), and CSL became a wholly-owned
subsidiary of PhyMatrix. The purchase price for CSL consisted of an aggregate of
5,204,305 shares of the Company's common stock (the "Shares") plus certain costs
and expenses assumed in the Merger. The Company has agreed to register under the
Securities Act of 1933, as amended, the resale of the Shares acquired by the
former shareholders of CSL in the Merger.
CSL is a multi-therapeutic site management organization ("SMO") based
in Providence, Rhode Island providing clinical investigative site management
services to 22 research facilities in 11 states. CSL wholly-owns and centrally
manages Phase I-IV research facilities conducting clinical trials for
pharmaceutical companies and contract research organizations ("CROs"). CROs are
independent companies that assist pharmaceutical and biotechnology companies
with the complex and multi-stage drug regulatory process. Although CSL has
conducted and continues to conduct clinical research in a wide variety of
therapeutic areas, the company's focus has historically been in trials in the
therapeutic areas of the central nervous system, geriontology, women's health
and endocrinology.
CSL contracts either directly with a clinical trial sponsor, such as a
pharmaceutical or biotechnology company, or a CRO to engage in the clinical
testing of certain drugs or medical devices required by the Food and Drug
Administration and various international authorities prior to the
commercialization of a pharmaceutical product. As pharmaceutical companies focus
on ways in which to reduce development costs and improve profitability, these
companies are shifting many aspects of the drug development process to CROs and
SMOs in order to reduce the costs associated with and improve the speed of the
clinical research and testing process. The Company believes that through CSL's
committed network of research facilities functioning in a centralized and
uniform operating environment, it can provide an efficient, responsive and
effective resource for sponsors and CROs who seek to expedite the clinical trial
process in an effort to bring new products to market.
In connection with the Merger, the management of the Company has agreed
to recommend Michael T. Heffernan, the Chief Executive Officer of CSL, for
election to the Board of Directors of the Company, and the Company and Mr.
Heffernan have entered into an employment agreement, dated October 15, 1997,
relating to Mr. Heffernan's continued employment as Chief Executive Officer of
CSL.
The Merger has been accounted for as a pooling of interests.
Accordingly, the financial statements of the Company for all periods prior to
the effective date of the Merger have been restated to include CSL and Clinical
Marketing, Ltd., which was merged into CSL on January 1, 1997. The restated
supplemental financial statements of the Company are presented below and are
preceded by Management's Discussion and Analysis of Financial Condition and
Results of Operations relating to such restated supplemental financial
statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
The Company is a multispecialty physician practice management company that
provides management services to the medical community. The Company also develops
medical malls, medical office buildings, and health parks, both for its own
account and for leading hospitals and health systems. The Company's primary
strategy is to develop management networks in specific geographic locations by
affiliating with physicians, medical providers and medical networks. The Company
affiliates with physicians by acquiring their practices and entering into
long-term management agreements with the acquired practices and by managing
independent physician associations ("IPAs") and specialty care physician
networks through management service organizations ("MSOs") in which the Company
has ownership interests. 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, lithotripsy services, ambulatory
surgery and clinical research studies. Since its first acquisition in September
1994, the Company has acquired the practices of and entered into long-term
agreements to affiliate with approximately 360 physicians; has obtained
interests in MSOs in Connecticut, Georgia, New Jersey, New York and Florida that
provide management services to IPAs composed of over 3,600 multispecialty
physicians; purchased a company that provides contract management services to
approximately 2,500 physicians in specialty care networks; purchased CSL, a site
management organization conducting clinical research for pharmaceutical
companies and clinical research organizations at 22 centers located in 11
states; and acquired several medical support services companies and a medical
facility development company.
In January 1996, the Company changed its fiscal year end from December 31
to January 31.
Year Ended January 31, 1997 and the Six Months Ended July 31, 1997 Acquisitions
Physician Practice Acquisitions
Between April and June 1996, the Company purchased the assets of and
entered into employment agreements with Drs. Lawler, Cutler and Surowitz. The
total purchase price for these assets was $2,154,999 in cash and 69,799 shares
of Common Stock of the Company were issued during July 1997 having a value of
$1,058,400. The value of the Common Stock issued had been recorded in other
long-term liabilities at January 31, 1997. The purchase price has been allocated
to the assets at their fair market value including goodwill of $2,862,035. The
resulting goodwill is being amortized over 20 years.
During May 1996, the Company purchased the stock of Atlanta
Gastroenterology Associates, P.C. pursuant to a tax free merger and entered into
a 40-year management agreement with the medical practice in exchange for 324,252
shares of Common Stock of the Company having a value of approximately
$6,100,000. The transaction has been accounted for using the
pooling-of-interests method of accounting.
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 whose practices the Company acquired for $609,124.
$309,124 of such purchase price was paid in cash and 20,684 shares of Common
Stock of the Company were issued in July 1997 having a value of $300,000. The
purchase price has been allocated to the assets at their fair market value,
including management service agreements of approximately $609,124. The resulting
intangible is being amortized over 20 years.
During May and June 1996, the Company entered into agreements to purchase
the assets of and entered into 20-year management agreements with two physician
practices consisting of three physicians. These practices are located in South
Florida and Washington, D.C. The total purchase price for the assets of these
practices was $1,214,291. Of this amount, $663,667 was paid in cash and 29,350
shares of Common Stock of the Company were
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issued during May and June 1997 having a value of $550,954. The value of the
Common Stock issued had been recorded in other long-term liabilities at January
31, 1997. The purchase price has been allocated to the assets at their fair
market value, including management service agreements of $749,646. The resulting
intangible is being amortized over 20 years.
During July 1996, the Company purchased the assets of and entered into a
20-year management agreement with four physicians in Florida. The purchase price
for these assets was approximately $948,610, which was paid in cash. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $328,838. The resulting intangible is
being amortized over 20 years.
During July 1996, the Company purchased the assets of and entered into a
20-year management agreement with three urologists in Atlanta, Georgia. The
purchase price for these assets was $755,163. Of such purchase price, $475,163
was paid in cash and 18,046 shares of Common Stock of the Company were issued
during July 1997 having a value of $280,000. The value of the Common Stock
issued had been recorded in other long-term liabilities at January 31, 1997. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of approximately $399,974. The resulting
intangible is being amortized over 20 years.
During August 1996, the Company purchased the assets of and entered into a
management agreement with Atlantic Pediatrics. The purchase price for these
assets was $412,539. Simultaneous with the closing, Atlantic Pediatrics was
merged into Osler Medical, Inc. During the second quarter of 1996, the Company
also acquired certain copyright and trademark interests for a purchase price of
$887,000. The total purchase price for the assets acquired was allocated to such
assets at their fair market value, including management service agreements of
$1,215,074. The resulting intangible is being amortized over 20 years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with eight physicians in Florida. The purchase
price for these assets was $3,439,331. Of such purchase price, $1,519,331 was
paid in cash and 122,841 shares of Common Stock of the Company were issued
during August 1997 having a value of $1,920,000. The value of the Common Stock
issued had been recorded in other long-term liabilities at January 31, 1997. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $2,625,699. The resulting intangible
is being amortized over 40 years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with four physicians in Georgia. The purchase price
for these assets was $1,548,756. Of such purchase price, $855,956 was paid in
cash and 44,126 shares of Common Stock of the Company were issued during August
1997 having a value of $692,800. The value of the Common Stock issued had been
recorded in other long-term liabilities at January 31, 1997. The purchase price
has been allocated to these assets at their fair market value, including
management service agreements of $1,116,259. The resulting intangible is being
amortized over 40 years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with 10 physicians in Florida. The purchase price
for these assets was $3,294,499. Of such purchase price, $920,099 was paid in
cash and 192,649 shares of Common Stock of the Company were issued during
September 1997 having a value of $2,374,400. The value of the Common Stock
issued had been recorded in other long-term liabilities at January 31, 1997. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $3,161,192. The resulting intangible
is being amortized over 40 years.
During October 1996, the Company purchased the assets of and entered into
20-year management agreements with five physicians in Florida. The purchase
price for these assets was $1,341,521. Of such purchase price $806,521 was paid
in cash and 33,331 shares of Common Stock of the Company were issued during
October 1997 having a value of $535,000. The value of the Common Stock issued
had been recorded in other long-term liabilities at January 31, 1997. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $670,000. The resulting intangible is
being amortized over 20 years.
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During January 1997, the Company purchased the stock of Atlanta Specialists
in Gastroenterology pursuant to a merger and entered into a 40-year management
agreement with the medical practice in exchange for 108,393 shares of Common
Stock of the Company having a value of approximately $1,578,205. The transaction
was accounted for using the pooling-of-interests method of accounting.
During January 1997, the Company purchased the assets of and entered into a
40-year management agreement with 14 physicians in Texas. The purchase price for
these assets was $6,029,272. Of such purchase price, $2,333,272 was paid in cash
and $3,696,000 is payable during January 1998 in Common Stock of the Company
with such number of shares to be purchased based upon the average price of the
stock during the five business days prior to the issuance. The value of the
Common Stock to be issued has been recorded in other long-term liabilities at
January 31, 1997. The purchase price has been allocated to these assets at their
fair market value, including management service agreements of $4,640,493. The
resulting intangible is being amortized over 40 years.
During January 1997, the Company purchased the assets of and entered into a
40-year management agreement with 18 physicians in Florida. The purchase price
for these assets was $4,500,652. Of such purchase price, $2,273,613 was paid in
cash, $1,500,000 of bank debt was assumed and 42,830 shares of Common Stock were
issued having a value of $727,039. The purchase price has been allocated to
these assets at their fair market value, including management service agreements
of $3,814,400. The resulting intangible is being amortized over 40 years.
During February 1997, the Company purchased the stock of a six physician
practice pursuant to a merger and entered into a 40-year management agreement
with the practice in exchange for 159,312 shares of Common Stock of the Company
having a value of approximately $2,440,000. The transaction has been accounted
for using the pooling-of-interests method of accounting.
During February 1997, the Company purchased the assets of and entered into
a 40-year management agreement with five physicians in Utah. The purchase price
was $2,498,148. Of such purchase price, $1,378,148 was paid in cash and 75,293
shares of Common Stock of the Company were issued having a value of $1,120,000.
The purchase price was allocated to the assets at their fair market value,
including management service agreements of $1,499,013. The resulting intangible
is being amortized over 40 years.
During May 1997, the Company entered into a 40-year management agreement
with a radiation therapy center in Westchester, New York. The purchase price was
$2,550,000. Of such purchase price $1,200,000 was paid in cash and $1,350,000 is
payable during May 1998 in Common Stock of the Company with such number of
shares to be issued based upon the average price of the stock during the five
business days prior to the issuance. The value of the Common Stock to be issued
has been recorded in other long-term liabilities at July 31, 1997. The purchase
price has been allocated to management service agreements and is being amortized
over 40 years.
During July 1997, the Company entered into a management services agreement
with Beth Israel Hospital to manage its DOCS Division which consists of more
than 100 physicians located throughout the greater Metropolitan New York area.
In addition, the Company and Beth Israel Hospital will be completing the
formation of an MSO to manage the medical risk contracting to the more than
2,000 physicians affiliated with Beth Israel Hospital and its parent
corporation. The Management Services Agreement became effective July 1, 1997,
and will remain in effect for 40 years contingent upon the closing of the MSO
joint venture prior to January 15, 1998. The Company has committed up to $40
million in conjunction with the transaction to be utilized for the expansion of
the Beth Israel delivery system throughout the New York region. In connection
with the agreement, the Company paid $13,560,000 in cash, which was allocated to
management service agreements and is being amortized over 40 years.
Accounting Treatment
The terms of the Company's relationships with its affiliated physicians are
set forth in various asset and stock purchase agreements, management service
agreements, and employment and consulting agreements. Through the asset and/or
stock purchase agreement, the Company acquires the equipment, furniture,
fixtures, supplies and, in certain instances, service agreements, of a physician
practice at the fair market value of the assets. The accounts receivable are
typically purchased at the net realizable value. The purchase price of the
practice generally consists of
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cash, notes and/or Common Stock of the Company and the assumption of certain
debt, leases and other contracts necessary for the operation of the practice.
The management services or employment agreements delineate the responsibilities
and obligations of each party.
Net revenue from management service agreements include the revenues
generated by the physician practices. The Company is responsible and at risk for
the operating costs of the physician practices. Expenses include the
reimbursement of all medical practice operating costs and all payments to
physicians (which are reflected as cost of affiliated physician management
services) as required under the various management agreements. For providing
services under management services agreements entered into prior to April 30,
1996, physicians generally received a fixed percentage of net revenue of the
practice. "Net revenues" is defined as all revenue computed on an accrual basis
generated by or on behalf of the practice after taking into account certain
contractual adjustments or allowances. The revenue is generated from
professional medical services furnished to patients 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.
Under management services agreements entered into after April 30, 1996, the
physicians receive a portion of the operating income of the practice which
amounts vary depending on the profitability of the practice. Net revenues under
management services agreements for the six months ended July 31, 1997 and the
year ended January 31, 1997 were $75.7 million and $90.2 million, respectively.
Medical Support Services Companies Acquisitions and CSL Merger
Acquisitions
During August 1996, the Company acquired the business and certain assets of
a single site clinical research company in Sarasota, Florida for $300,000 plus
contingent consideration based on profitability measures over the next five
years. The purchase price consisted of $100,000 of cash and the issuance of two
subordinated promissory notes of $100,000 each. The contingent payments will
equal 15% of the increase in adjusted income before tax, of the acquired
business, over the prior year's amount. The contingent payments will not be less
than $221,025. The full amount of the minimum payments was accrued for at the
date of the acquisition. During October 1996, the Company acquired the business
and certain assets of a multi-site clinical research company in Pennsylvania for
$6,850,000 plus contingent consideration based on profitability measures over
the next five years. The purchase price consisted of $3,100,000 of cash and the
issuance of two subordinated promissory notes of $2,000,000 and $1,750,000,
respectively. The contingent payments will equal 15% of the excess of adjusted
income before tax over $2,000,000 per year for five years. The cost of these
acquisitions was allocated on the basis of the estimated fair value of the
assets acquired and the liabilities assumed. This allocation resulted in
goodwill of $6,966,000, noncompete agreements of $355,000 and trained workforces
of $50,000. The notes mentioned above are convertible into shares of Common
Stock.
During October 1996, the Company purchased the assets of an outpatient
ambulatory surgical center in Florida. The Company entered into a lease under
which the surgical center was leased to a partnership with an initial term of 15
years. In addition, the Company entered into a 20-year management agreement
pursuant to which the Company receives a management fee which is based upon the
performance of the surgical center. The purchase price for these assets was
$3,531,630 plus the assumption of debt of $1,223,625 which consisted of $717,557
in a mortgage payable and $506,068 in capital leases. The purchase price has
been allocated to the assets at their fair market value, including management
service agreements of $2,597,409. The resulting intangible is being amortized
over 20 years.
During April 1997, the Company acquired the business and certain assets of
a clinical research company in the Washington, D.C. area for $725,000 in the
form of a promissory note plus contingent consideration based on revenue and
profitability measures over the next five years. The contingent payments will
equal 10% of the excess gross revenue, as defined, provided the gross operating
margins of the acquired business exceed 30%. The purchase price was allocated to
goodwill. The note and contingent payments are, in certain circumstances,
convertible into shares of Common Stock.
During June 1997, the Company purchased the assets of two diagnostic
imaging centers in Dade County, Florida. The purchase price was approximately
$12,500,000 plus the assumption of debt and capital leases totaling
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$1,570,078. Of such purchase price, $500,000 was paid in cash and the remaining
$12,000,000 was paid by the issuance of 773,026 shares of Common Stock of the
Company, 562,500 of which were issued in June 1997 and 210,526 of which were
issued in September 1997. The purchase price was allocated to the assets at
their fair market value, including goodwill of $10,180,273. The resulting
intangible is being amortized over 30 years.
During June 1997, the Company acquired the remaining 20% interest in a
lithotripsy company that it purchased during 1994. The interest was acquired in
exchange for cash and 54,500 shares of Common Stock of the Company having a
total value of $2,005,000. The purchase price was allocated to goodwill and is
being amortized over 20 years.
During June 1997, the Company issued 100,002 shares of Common Stock of the
Company having a value of approximately $1,500,000 to the former shareholders of
Pinnacle Associates, Inc. ("Pinnacle"). The issuance of the shares represented
the merger consideration for Pinnacle which was purchased during 1995.
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CSL Merger
Effective October 15, 1997, a subsidiary of the Company merged with CSL in
a transaction that was accounted for as a pooling of interests. The Company
exchanged 5,204,305 shares of its common stock for all of the outstanding common
stock of CSL. The Company's historical financial statements for all periods have
been restated to include the results of CSL.
The following table reflects the combined revenues, net income, net income
per share and weighted average number of shares outstanding for the respective
periods. The Pro forma Combined column adjusts the historical net income for CSL
to reflect the results of operations as if CSL had been a C corporation rather
than an S corporation for income tax purposes. The Adjusted Pro forma Combined
column adjusts the Pro Forma Combined column by eliminating certain
noncontinuing charges incurred by CSL. Provisions for income taxes have not been
reflected for the years ended December 31, 1994 and 1995 because there is no
taxable income on a combined basis.
<TABLE>
<CAPTION>
Adjusted
Pro forma Pro forma
PhyMatrix CSL Combined Combined
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For the six months ended July 31, 1997
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<S> <C> <C> <C> <C>
Revenue $145,646,752 $13,128,176 $158,774,928 $158,774,928
Net Income $ 8,196,216 $ 377,687 $ 8,573,903 $ 9,118,103
Net Income per weighted
average share $ 0.34 $ 0.07 $ 0.29 $ 0.31
Weighted average number of
shares outstanding 23,863,289 5,289,127 29,152,416 29,152,416
For the six months ended July 31, 1996
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Revenue $ 77,631,077 $ 7,031,545 $ 84,662,622 $ 84,662,622
Net Income $ 5,062,509 $ 391,675 $ 5,454,184 $ 5,965,984
Net income per weighted
average share $ 0.23 $ 0.07 $ 0.20 $ 0.22
Weighted average number of
shares outstanding 21,689,631 5,086,932 26,776,563 26,776,563
For the year ended January 31, 1997
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Revenue $189,960,735 $18,040,124 $208,000,859 $208,000,859
Net Income $ 12,056,531 $ 1,940,074 $ 13,996,605 $ 15,154,005
Net income per weighted
average share $ 0.54 $ 0.37 $ 0.51 $ 0.55
Weighted average number of
shares outstanding 22,511,448 5,191,625 27,703,073 27,703,073
For the year ended December 31, 1995
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Revenue $ 70,733,282 $13,351,843 $ 84,085,125 $ 84,085,125
Net Income $(11,024,915) $ 2,931,175 $ (8,093,740) $ (5,960,740)
For the year ended December 31, 1994
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Revenue $ 2,446,821 $ 4,921,285 $ 7,368,106 $ 7,368,106
Net Income $ (1,296,737) $ (98,702) $ (1,395,439) $ (473,439)
</TABLE>
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The following items reflect the noncontinuing charges, referred to above,
incurred by CSL during the respective periods:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
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December 31, December 31, December 31, June 30, July 31,
1994 1995 1996 1996 1997
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(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Salaries expense related to the $ - $ - $ 628,000 $ - $ -
equity interest granted to an
officer of CSL. During January
1997, the officer entered into an
employment agreement with no
provisions for sharing of profits
or proceeds.
Consulting fees based on a profit 120,000 433,000 314,000 145,000 -
sharing arrangement. The profit
sharing arrangement was
terminated during 1997.
Management fees paid to the 802,000 1,700,000 987,000 708,000 907,000
principal shareholders of CSL
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Total nonrecurring items 922,000 2,133,000 1,929,000 853,000 907,000
After tax impact of nonrecurring $ 922,000 $ 2,133,000 $1,157,400 $ 511,800 $ 544,200
items
</TABLE>
Prior to its merger with the Company, CSL reported on a fiscal year ending
December 31. Prior to its initial public offering during January 1996, the
Company reported on a fiscal year ending December 31. The fiscal year end of the
Company was changed to January beginning with the one month period ended January
31, 1996. The restated financial statements for the year ended January 31, 1997
are based on a combination of the Company's results for its January 31 fiscal
year and a December 31 fiscal year for CSL. CSL's historical results of
operations for the month ending January 31, 1997 are not included in the
Company's consolidated statements of operations or cash flows. An adjustment has
been made to stockholder's equity as of February 1, 1997 to adjust for the
effect of excluding CSL's results of operations for the month ending January 31,
1997.
As a result of using the pooling of interests method of accounting,
estimated transaction expenses of $10,150,000 will be recorded as a one-time
charge to the Company's statement of operations during the quarter ended October
31, 1997, which is the period in which the transaction closed. A summary of
these estimated expenses is as shown below:
CSL PhyMatrix Total
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Legal $ 200,000 $300,000 $ 500,000
Accounting 200,000 175,000 375,000
Investment Banking 3,600,000 325,000 3,925,000
Other 250,000 100,000 350,000
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Subtotal transaction expenses 4,250,000 900,000 5,150,000
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CNS Consulting (1) 5,000,000 0 5,000,000
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Total $9,250,000 $900,000 $10,150,000
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(1) Represents buyout of consulting contract.
Management Services Organizations and Contract Management Acquisitions
During December 1995, the Company obtained a 43.75% interest in Physicians
Choice Management, LLC, an MSO that provides management services to an IPA
composed of over 375 physicians based in Connecticut. The
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Company acquired this interest in exchange for a payment of $1.5 million to the
MSOs shareholders ($1.0 million paid during 1995 and $.5 million paid during the
second quarter of 1996) and a capital contribution of $2.0 million to the MSO
($1.5 million paid during 1995 and $.5 million paid during the second quarter of
1996). In addition, upon the closing of the Company's initial public offering in
January 1996, the Company granted options to purchase 300,000 shares of Common
Stock to certain MSO employees in conjunction with their employment agreements.
These options vest over a two-year period with the exercise price equaling the
fair market value of the Company's stock on the date such shares become
exercisable. During September 1996, the Company acquired the remaining 56.25%
ownership interest in the MSO. The Company acquired the remaining interests in
exchange for a payment of $1,000,000 in cash plus 363,442 shares of Common Stock
of the Company. The Company also committed to loan the MSO's selling
shareholders $2,800,000 to pay the tax liability related to the sale. As of
January 31, 1997 $2,253,000 of the loan amount committed had been advanced to
the selling shareholders by the Company. The total purchase price for the 100%
interest was approximately $12,148,822 and has been allocated to these assets at
their fair market value including goodwill of $12,099,111. The resulting
intangible is being amortized over 40 years.
During April 1996, the Company purchased a 50% interest in Central Georgia
Medical Management, LLC, an 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 January
31, 1997 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 September 1996, the Company purchased an 80% interest in New Jersey
Medical Management, LLC, an MSO that provides management services to an IPA with
more than 450 physicians in New Jersey. The Company acquired this interest in
exchange for a payment of $350,000 to existing shareholders. The Company's
balance sheet at January 31, 1997 includes the 20% interest not owned by the
Company as minority interest.
During September 1996, the Company purchased the stock of Physicians
Consultant and Management Corporation ("PCMC"), a company based in Florida that
provides the managed health care industry with assistance in provider relations,
utilization review and quality assurance. The base purchase price for the stock
was $2,000,000 with $1,000,000 paid on the closing date and $1,000,000 paid
during February 1997. There is also a contingent payment up to a maximum of
$10,000,000 based on PCMC's earnings before taxes during the next five years
which will be paid in cash and/or Common Stock of the Company. The purchase
price has been allocated to the assets at their fair market value including
goodwill of approximately $3,078,568. The resulting intangible is being
amortized over 30 years.
During November 1996, the Company established New York Network Management,
L.L.C. ("Network"), which is 51% owned by the Company, to purchase the assets
and stock of various entities which comprise Brooklyn Medical Systems ("BMS").
BMS arranges for the delivery of health care services to members through
affiliations with more than 600 physicians in the New York City area. The base
purchase price for Network was $1,200,000 and an additional payment not
exceeding $1,000,000 may be required to be made during the next three years if
certain pretax earnings thresholds are achieved. The Company has committed to
fund approximately $2,400,000 to Network during the next three years. Such
advances can be in the form of a demand loan or for additional ownership
interests if the other owners do not elect to contribute their pro-rata share of
any additional capital contribution ($100,000 of additional capital contribution
for an additional 1% interest) in Network. During the first three years the
Company has the option to purchase up to an additional 29% ownership interest.
During years four and five the owners of 29% of Network have the right to
require the Company to purchase their interests at the option price.
During April 1997, the Company acquired a pulmonary physician network
company for a base purchase price of $2,966,058. Of such purchase price,
$673,211 was paid in cash and 180,717 shares of Common Stock of the Company were
issued during May 1997 having a value of $2,292,847. There is also a contingent
payment up to a maximum of $2,000,000 based on the acquired entities' earnings
before taxes during the next three years which will
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be paid in cash and/or Common Stock of the Company. The purchase price was
allocated to management service agreements and is being amortized over 30 years.
Year Ended December 31, 1995 Acquisitions
Physician Practice Acquisitions
During the year ended December 31, 1995, the Company purchased the assets
of several physician practices and in conjunction with those purchases entered
into employment agreements with 14 physicians in Florida. The total purchase
price for these assets was $4,158,875. The purchase price was allocated to these
assets at their fair market value, including goodwill of $3,093,946. The
resulting goodwill is being amortized over 20 years.
During the year ended December 31, 1995, the Company purchased the assets
of and entered into management service agreements with Oncology-Hematology
Associates, P.A. and Oncology-Hematology Infusion Therapy, Inc.; Georgia Cancer
Specialists, Inc.; Osler Medical, Inc.; Oncology Radiation Associates, P.A.;
West Shore Urology; Whittle, Varnell and Bedoya, P.A.; Oncology Care Associates;
Venkat Mani; and Symington, consisting of an aggregate of 79 physicians
including 45 oncologists. The total purchase price for these assets was
$23,425,190 in cash. In connection with these acquisitions, the Company also
entered into a 15-year capital lease with a total obligation of $1,569,171 and
assumed debt of $6,893,609. The purchase price for the practices' assets was
allocated to assets at their fair market value, including management service
agreements of $18,814,763. The resulting intangible is being amortized over the
life of the management agreements which range from ten to 20 years.
Medical Support Services Companies Acquisitions
During March 1995, the Company acquired by merger all of the outstanding
shares of stock of Oncology Therapies, Inc. (formerly known as Radiation Care,
Inc. and referred to herein as "OTI") for $2.625 per share. OTI owns and
operates outpatient radiation therapy centers utilized in the treatment of
cancer and diagnostic imaging centers. The total purchase price for the stock
was approximately $41,470,207 (not including transaction costs and 26,800 shares
initially subject to appraisal rights). During April 1995, the Company purchased
from Aegis Health Systems, Inc. for $7,163,126 all of the assets used in its
lithotripsy services business. During November 1995 the Company acquired by
merger Pinnacle Associates, Inc. ("Pinnacle"), an Atlanta, Georgia infusion
therapy services company. The merger consideration in connection with the
Pinnacle merger was paid in June 1997. The purchase price for these acquisitions
was allocated to assets at their fair market value including goodwill of
$19,235,818. The resulting intangibles are being amortized over 20 to 40 years.
Medical Facility Development Acquisitions
On May 31, 1995, Abraham D. Gosman, Chairman of the Board and Chief
Executive Officer of the Company ("Mr. Gosman") purchased a 50% ownership
interest in DASCO Development Corporation and DASCO Development West, Inc.
(collectively, "DASCO"), a medical facility development services company
providing such services to related and unrelated third parties in connection
with the development of medical malls, health parks, and medical office
buildings. The purchase price consisted of $5.2 million in cash and $4.6 million
in notes, which were guaranteed by Mr. Gosman. Upon the closing of the Company's
initial public offering, Mr. Gosman, Donald A. Sands and Bruce A. Rendina, the
Company's principal promoters, and certain management and founder stockholders
exchanged their ownership interests in DASCO for shares of Common Stock equal to
a total of $55 million or 3,666,667 shares. The Company believes that its
medical facility development services and project finance strategy are a
significant component of the Company's overall business strategy. The historical
book value of Messrs. Sands' and Rendina's interest in DASCO is $22,735. The
initial 50% purchase price was allocated to assets at their fair market value,
primarily goodwill of $9.8 million with the exchange recorded at historical
value. At December 31, 1995, the acquisition of the 50% interest in DASCO was
being accounted for using the equity method.
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Year Ended December 31, 1994 Acquisitions
Medical Support Services Companies Acquisitions
During September 1994, an 80% owned subsidiary of the Company purchased
substantially all of the assets of Uromed Technologies, Inc. ("Uromed"), a
provider of lithotripsy services in Florida, for a purchase price of $3,141,535
plus the assumption of capital lease obligations of $1,097,614. The Company
acquired the outstanding 20% interest in the subsidiary during June 1997. 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. 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. Subsequent to its 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 of $4,000,000. 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 plus the assumption of $225,000 in debt.
The purchase price for these acquisitions was allocated to assets at their fair
market value, including goodwill of $14,818,145. The resulting intangibles are
being amortized over 20 to 40 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.
Results of Operations
Six Months Ended July 31, 1997 Compared to Six Months Ended July 31, 1996
The following discussion reviews the results of operations for the six
months ended July 31, 1997 (the "1997 Period") compared to the six months ended
July 31, 1996 (the "1996 Period").
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, noncancer 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. Noncancer physician
services include physician practice management services to all practices managed
by the Company other than oncology practices and administrative services to
health plans which include reviewing, processing, and paying claims and
subcontracting with specialty care physicians to provide covered services. Other
medical support services include home health care services, lithotripsy, various
health care management services, diagnostic imaging, ambulatory surgery, and
clinical research studies.
Net revenues were $158.8 million for the 1997 Period. Of this amount, $52.2
million or 32.9% of such revenues was attributable to cancer services; $67.9
million or 42.8% was related to noncancer physician services; $28.2 million or
17.7% of such revenues was attributable to other medical support services; and
$10.5 million or 6.6% related to medical facility development.
Net revenues were $84.7 million for the 1996 Period. Such revenues
consisted of $44.3 million or 52.3% related to cancer services; $15.9 million or
18.8% related to noncancer physician services; $17.1 million or 20.2% related to
other medical support services; and $7.4 million or 8.7% related to medical
facility development.
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Expenses
The Company's cost of affiliated physician management services was $33.5
million or 44.3% of net revenue from management services agreements during the
1997 Period. The cost of affiliated physician management services was $17.4
million or 47.7% of net revenue from management services agreements during the
1996 Period. Net revenue for the physician practices managed by the Company was
$75.7 million during the 1997 Period and $36.5 million during the 1996 Period.
The cost of affiliated physician management services as a percentage of net
revenue from management services varies based upon the type of physician
practices.
The Company's salaries, wages, and benefits increased by $12.4 million from
$26.7 million or 31.5% of net revenues during the 1996 Period to $39.1 million
or 24.6% of net revenues during the 1997 Period. The decrease as a percentage of
net revenues is primarily attributable to (i) the fact that since the Company's
commencement of operations during 1994, it has been able to spread its salaries,
wages, and benefits over a rapidly expanding revenue base and (ii) salaries,
wages, and benefits varies depending on whether the physician practice is owned
or managed.
The Company's supplies expense increased by $8.2 million from $11.7 million
or 13.8% of net revenues during the 1996 Period to $19.9 million or 12.5% of net
revenues during the 1997 Period. The increase in supplies expense is primarily a
result of the acquisition of additional physician practices. Supplies expense as
a percentage of net revenues varies depending upon the type of physician
practices.
The Company's depreciation and amortization expense increased by $1.6
million from $3.3 million or 3.9% of net revenues during the 1996 Period to $4.9
million or 3.1% of net revenues during the 1997 Period. The increase is
primarily a result of the acquisitions completed after the 1996 Period and the
allocation of the purchase price as required by purchase accounting. During the
1997 Period, the Company sold the assets of an entity that it acquired in March
1995 and subsequently closed. The sale of the assets resulted in a gain of $0.7
million. In addition, the Company recorded nonrecurring charges of $0.4 million
during the 1997 Period. These nonrecurring items have been included in other
expenses on the statement of operations.
The Company's rent expense increased by $3.4 million from $3.8 million or
4.5% of net revenues during the 1996 Period to $7.2 million or 4.5% of net
revenues during the 1997 Period. Rent expense as a percentage of net revenue
varies depending upon the size of each of the affiliated practice's offices, the
number of satellite offices and the current market rental rate for medical
office space in a particular geographic market.
The Company's income tax expense increased by $1.5 million from $3.0
million or 34.7% of pre-tax income during the 1996 Period to $4.5 million or
34.0% of pre-tax income during the 1997 Period. The Company follows the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting For Income Taxes."
Prior to the CSL merger, CSL was treated as a S corporation under the
Internal Revenue Code (the "Code") and its stockholders recognized its income
for income tax purposes. Accordingly, the Company's statements of operations do
not include provisions for income taxes for income related to CSL. Prior to the
CSL merger, dividends were paid primarily to reimburse stockholders for income
tax liabilities incurred by them.
The pro forma net income and net income per share information in the
consolidated statement of operations reflect the effect on historical results as
if CSL had been a C corporation rather than an S corporation and had paid income
taxes.
Medical Facility Development
The Company 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
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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. Net revenues from
medical facility development are recognized at the time services are performed.
In some cases fees are earned upon the achievement of certain milestones in the
development process, including the receipt of a building permit and a
certificate of occupancy of the building. Unearned revenue relates to all fees
received in advance of services being completed on development projects.
The Company typically receives the following compensation for its services:
development fees (including management of land acquisition, subdivision, zoning,
surveying, site planning, permitting and building design), general contracting
management fees, leasing and marketing fees, project cost savings income (based
on the difference between total budgeted project costs and actual costs) and
consulting fees.
The amount of development fees and leasing and marketing fees are stated in
the development and marketing agreements. Those agreements also provide the
basis for payment of the fees. The financing fees and consulting fees are
generally not included in specific agreements but are negotiated and disclosed
in project pro formas provided to the owners of the buildings and hospital
clients. Specific agreements usually incorporate those pro formas and provide
that the projects will be developed in conformity therewith. General contracting
management fees and project cost savings income are included in guaranteed
maximum cost contracts entered into with the general contractor. These contracts
are usually approved by the owners which in many cases include hospital clients
and prospective tenants. During the 1997 Period, the Company's medical facility
development generated revenues of $10.4 million and pretax income of $6.5
million.
Results of Operations
Year Ended January 31, 1997 Compared to the Year Ended December 31, 1995
The following discussion reviews the results of operations for the year ended
January 31, 1997 ("1997"), compared to the year ended December 31, 1995
("1995"), respectively.
Revenues
Net revenues were $208.0 million during 1997. Of this amount, $95.0 million
or 45.7% of such revenues was attributable to cancer services; $55.4 million or
26.6% was related to noncancer physician services; $38.6 million or 18.6% of
such revenues was attributable to other medical support services; and $19.0
million or 9.1% related to medical facility development. At January 31, 1997,
the Company had affiliations with 226 physicians.
Net revenues were $84.1 million during 1995. Of this amount, $44.9 million
or 53.4% of such revenues was attributable to cancer services; $7.7 million or
9.2% related to noncancer physician services; and $31.5 million or 37.4% related
to other medical support services. At December 31, 1995, the Company had
affiliations with 103 physicians.
Expenses
The Company's cost of affiliated physician management services was $42.2
million or 46.8% of net revenue from management service agreements during 1997.
The cost of affiliated physician management services was $9.7 million or 43.3%
of net revenue from management service agreements during 1995. Net revenue for
these managed physician practices was $90.2 million during 1997 and $22.4
million during 1995, respectively. The cost of affiliated physician management
services as a percentage of net revenue from management services will vary based
upon the type of physician practices.
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The Company's salaries, wages, and benefits increased by $22.5 million from
$35.8 million or 42.5% of net revenues during 1995 to $58.4 million or 28.1% of
net revenues during 1997. The decrease as a percentage of net revenues is
primarily attributable to (i) the fact that since the Company's commencement of
the Company's non-clinical research study operations during 1994, it has been
able to spread its salaries, wages, and benefits over a rapidly expanding
revenue base and (ii) salaries, wages and benefits varies depending upon whether
the physician practice is owned or managed.
The Company's supplies expense increased by $15.1 million from $12.1
million or 14.4% during 1995 to $27.2 million or 13.1% during 1997. The increase
in supplies expense is primarily a result of the acquisition of additional
physician practices. The supplies expense as a percentage of net revenues will
vary based upon the type of physician practices.
The Company's depreciation and amortization expense increased by $3.4
million from $4.0 million or 4.7% of net revenues during 1995 to $7.4 million or
3.5% of net revenues during 1997. The increase primarily is a result of the
acquisitions completed during 1997 and the allocation of the purchase prices as
required per purchase accounting. One of the reasons for the decrease as a
percentage of net revenues is a result of the increased revenues during 1997
from the entities previously acquired.
The Company's rent expense increased by $3.4 million from $5.1 million or
6.1% of net revenues during 1995 to $8.5 million or 4.1% of net revenues during
1997. 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 provision for closure loss of $2.5 million during 1995
represents a charge for the writedown of assets to their estimated fair market
value and a reserve for the remaining lease obligation at two radiation therapy
centers that were acquired by the Company in March 1995 and subsequently closed.
The Company's earn-out payment during 1995 of $1.3 million represents a
payment to Nutrichem on the contingent note entered into in conjunction with the
acquisition of Nutrichem. During 1997 the Company sold its Nashville radiation
therapy center to a third party for $1.5 million which resulted in a gain on
sale of approximately $260,000. In addition, during 1997 the Company recorded a
charge of $250,000 related to the termination of an employment agreement with a
physician. These two nonrecurring items have been included in other expenses on
the statement of operations for 1997.
The Company's net interest expense decreased by $3.1 million from 1995 to
1997. Interest income of $4.1 million was earned during 1997, primarily on the
remaining proceeds from the Company's initial public offering and Convertible
Subordinated Debenture offering.
No income tax provision was required during 1995 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.
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Medical Facility Development
The Company 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 amount of development fees and
leasing and marketing fees are stated in the development and marketing
agreements. Those agreements also provide the basis for payment of the fees. The
financing fees and consulting fees are generally not included in specific
agreements but are negotiated and disclosed in project pro formas provided to
the owners of the buildings and hospital clients. Specific agreements usually
incorporate those pro formas and provide that the projects will be developed in
conformity therewith. General contracting management fees and project cost
savings income are included in guaranteed maximum cost contracts entered into
with the general contractor. These contracts are usually approved by the owners
which in many cases include hospital clients and prospective tenants. During
1997, the Company's medical facility development business generated revenues of
$19.0 million and operating income of $11.1 million.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
The following discussion reviews the historical results of operations for
the year ended December 31, 1995 ("1995") compared to the year ended December
31, 1994 ("1994").
All of the entities acquired by the Company (except the acquisition of CSL
which has been shown as being acquired as of January 1, 1994) were acquired
subsequent to June 23, 1994. As a result of such acquisitions, the Company
believes that any period to period comparisons and percentage relationships
within periods are not meaningful.
Revenues
The Company had revenues of $7.4 million for 1994. Of this amount, $.7
million or 9.5% of such revenues was attributable to cancer services; and $6.7
million or 90.5% of such revenues was attributable to other medical support
services. The Company had no physician related revenues during this period.
Net revenues of $84.1 million for 1995 include revenues from the
acquisitions completed during the period June 24, 1994 to December 31, 1995.
Such revenues during 1995 consisted of $44.9 million or 53.3% related to cancer
services; $7.7 million or 9.2% related to noncancer physician services; and
$31.5 million or 37.5% 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
of specialty physicians.
Expenses
For 1994 and for 1995, total operating and administrative expenses were
$8.7 million and $87.9 million, respectively. In 1994 and 1995, operating and
administrative expenses exceeded revenues due to the commencement of the
Company's non-clinical research study operations. No income tax provision was
required 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.
Liquidity and Capital Resources
Cash used by operating activities was $2.1 million for the 1997 Period.
Cash used by operating activities was $2.5 million for the 1996 Period. At July
31, 1997, the Company's principal sources of liquidity consisted of working
capital of $100.2 million which included $59.4 million in cash. The Company also
had $27.1 million of current liabilities, including approximately $3.6 million
of indebtedness maturing before July 31, 1998.
Cash used by investing activities was $19.5 million and $9.1 million for
the 1997 Period and 1996 Period, respectively. This primarily represents the
funds required by the Company for the acquisition of physician practices,
medical support services companies, or other medical networks or organizations,
and the advances under notes
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receivable of $5.3 million, partially offset by the repayments of notes
receivable of $10.0 million during the 1997 Period. In addition, during the 1997
Period, the Company sold one of its radiation therapy centers that had been
previously closed for $1.5 million.
Cash used by financing activities was $0.7 million for the 1997 Period and
primarily represented the borrowings under the revolving line of credit of $1.0
million, repayment of debt of $1.7 million and the release of restricted cash
collateralizing debt of $0.5 million. Cash provided by financing activities was
$74.3 million for the 1996 Period, which was primarily comprised of the proceeds
(net of offering costs) from the issuance of the Convertible Subordinated
Debentures of $94.8 million and the release of cash collateral of $1.5 million
offset by the repayment of advances from shareholder and other debt of $15.4
million and $5.5 million, respectively.
During 1996, the Company purchased the stock of a company based in Florida
that provides the managed health care industry with assistance in provider
relations, utilization review and quality assurance. In conjunction with this
acquisition, the Company may be required to make a contingent payment up to a
maximum of $10 million based on the acquired company's earnings before taxes
during the next five years. The payment, if required, shall be paid in cash
and/or Common Stock of the Company.
During July 1997, the Company entered into a management services agreement
to manage a network of over 100 physicians in New York. In connection with this
transaction, the Company has committed to expend up to $40 million to be
utilized for the expansion of the network.
During August 1997, the Company purchased certain assets of, and entered
into a 20-year administrative services agreement with BAB Nuclear Radiology,
P.C., to operate five diagnostic imaging centers on Long Island, New York. The
purchase price was approximately $10,000,000 in cash, plus $15,000,000 in
convertible notes.
During October 1997, a subsidiary of the Company merged with CSL in a
transaction that was accounted for as a pooling of interests. Pursuant to such
merger, the Company will record a one-time charge during the third quarter ended
October 31, 1997 of $10.1 million. This one-time charge represents estimated
transaction expenses and the one-time cost to buy out a consulting contract. In
addition, upon the closing of the merger during October 1997, the Company used
cash of approximately $5.0 million to repay CSL's revolving line of credit.
In conjunction with certain of its acquisitions, the Company has agreed to
make payments in shares of Common Stock of the Company which are generally
issued one year from the closing date of such acquisitions. The number of shares
to be issued are generally determined based upon the average price of the
Company's Common Stock during the five business days prior to the date of
issuance. As of July 31, 1997, the Company had committed to issue $10.9 million
of Common Stock of the Company using the methodology discussed above.
The Company's acquisition and expansion programs will require substantial
capital resources. In addition, the operation of physician groups, integrated
networks and related medical support services companies, and the development and
implementation of the Company's management information systems, will require
ongoing capital expenditures. The Company expects that its capital needs over
the next several years will substantially exceed capital generated from
operations. To finance its capital needs, the Company plans both to incur
indebtedness and to issue, from time to time, additional debt or equity
securities, including Common Stock or convertible notes, in connection with its
acquisitions and affiliations.
In September 1997, the Company entered into a secured credit agreement with
a bank providing for a $100 million revolving line of credit for working capital
and acquisition purposes. The credit agreement (i) prohibits the payment of
dividends by the Company, (ii) limits the Company's ability to incur
indebtedness and make acquisitions except as permitted under the credit
agreement and (iii) requires the Company to comply with certain financial
covenants.
The Company expects that the working capital as of July 31, 1997 of $100.2
million, which includes cash of $59.4 million, and amounts available under an
acquisition/working capital line of credit for $100 million will be adequate to
satisfy the Company's cash requirements for the next 12 months. However, there
can be no assurance that
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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.
Factors to be Considered
The part of this Form 8-K captioned "Management's Discussion and Analysis
of Financial Condition and Results of Operations" contains certain
forward-looking statements which involve risks and uncertainties. Readers should
refer to the factors set forth below and the factors discussed under "Factors to
be Considered" contained in Part I, Item 1 of the Company's Annual Report on
Form 10-K for the year ended January 31, 1997, which factors could cause the
Company's actual results to differ materially from the results anticipated in
such forward-looking statements. The factors discussed in said Form 10-K are
hereby incorporated by reference into this Form 8-K.
POTENTIAL LOSS OF CONTRACTS. Although the Company's clinical research
study contracts with sponsors provide that it is entitled to receive fees earned
through the date of termination, as well as all non-cancellable costs, sponsors
generally are free to terminate a clinical trial or the Company's contract
related thereto at any time. The length of a typical clinical trial contract
varies from several weeks to several years. Sponsors may terminate clinical
trials for several reasons, including unexpected results or adverse patient
reactions to a potential product, inadequate patient enrollment or investigator
recruitment, manufacturing problems resulting in shortages of a potential
product or decisions by the sponsor to de-emphasize or terminate a particular
trial or development efforts with respect to a particular potential product. A
sponsor's decision to terminate a trial in which the Company participates could
have a material adverse effect on the Company's business, results of operations
and financial condition.
GOVERNMENT REGULATION; POTENTIAL IMPACT OF HEALTH CARE REFORM. Demand
for the Company's services is largely a function of the regulatory requirements
associated with the approval of a new drug application imposed by the United
States Food and Drug Administration ("FDA"). These requirements are more
stringent and thus more burdensome than those imposed by many other developed
countries. In recent years, efforts have been made to streamline the drug
approval process and coordinate United States standards with those of other
developed countries. Changes in the level of regulation, including a relaxation
in regulatory requirements or the introduction of simplified drug approval
procedures could have a material adverse effect on the demand for the Company's
clinical trial services. Several competing proposals to reform the system of
health care delivery in the United States have been considered by Congress from
time to time. None of the proposals have been adopted. The process by which the
government will pursue additional or modified proposals for national health care
reform and the precise nature of any such proposals is unclear at this time.
Some of the proposals put forth to date incorporate price controls on drugs and
limits on overall medical spending which may adversely affect expenditures by
the pharmaceutical and biotechnology industries for research and development,
which could have a material adverse effect on the Company's business, results of
operations and financial condition. At present, it is impossible to predict the
effect of any new legislation or changes in regulatory environment on the
Company. The failure of the Company to comply with applicable regulations could
result in the termination of on-going research or the disqualification of data
for submission to regulatory authorities. Further, the issuance of a notice or
finding by the FDA to either the Company or its clients based upon a material
violation by the Company of either Good Clinical Practices or Good Laboratory
Practices could have a material adverse effect on the Company's business,
results of operations and financial condition.
POTENTIAL LIABILITY FROM OPERATIONS. Clinical trials involve the testing of
approved and experimental drugs on human beings. This testing carries with it a
significant risk of liability for personal injury or death to participants
resulting from an adverse reaction to, or improper administration of, the
potential product. The Company participates with sponsors in the selection
process. The Company also contracts on behalf of its customers with physicians
who render, and itself renders, professional services including administering
the drugs being tested to participants in these trials. Consequently, the
Company may be subject to claims in the event of personal injury or death of
persons participating in clinical trials and arising from professional
malpractice of physicians with whom it has contracted and its own employees.
Although the Company is generally indemnified by its clients for such liability,
in order for such indemnification to be valid, the Company and its employees and
agents must act within the bounds of specific procedural requirements governing
the conduct of the clinical trial. Since the value of the Company's
indemnification depends on the financial viability of the indemnifying party,
there can be no assurance that the Company will be able to rely on such
indemnification in each instance of potential liability. If the Company was
forced to undertake the defense of, or found financially responsible for, claims
based upon the foregoing or related risks, there could be a material adverse
effect on the Company's business, results of operations and financial condition.
-18-
<PAGE>
PHYMATRIX CORP.
INDEX TO SUPPLEMENTAL FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants F-2
Supplemental Balance Sheets as of July 31, 1997 (unaudited)
January 31, 1997, and December 31, 1995 F-3
Supplemental Statements of Operations for the six months ended July 31,
1997 and 1996 (unaudited) and the years ended January 31, 1997,
December 31, 1995 and December 31, 1994 F-4
Supplemental Statements of Changes in Shareholders' Equity for the six
months ended July 31, 1997 (unaudited) and the years ended
January 31, 1997, December 31, 1995 and December 31, 1994 F-5
Supplemental Statements of Cash Flows for the six months ended July 31,
1997 and 1996 (unaudited) and the years ended January 31, 1997,
December 31, 1995 and December 31, 1994 F-6
Notes to Supplemental Financial Statements F-7
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders of PhyMatrix Corp.(formerly known as
Continuum Care Corporation)
We have audited the supplemental consolidated financial statement of
financial position of PhyMatrix Corp. (formerly known as Continuum Care
Corporation) as of January 31, 1997 and the related supplemental consolidated
statements of operations, changes in shareholders' equity and cash flows for the
year ended January 31, 1997. We have also audited the accompanying supplemental
combined balance sheet of Phymatrix Corp. as of December 31, 1995 and the
related supplemental statements of operations, changes in shareholders' equity
and cash flows for the year ended December 31, 1995 and 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.
The supplemental financial statements give retroactive effect to the merger
of PhyMatrix Corp. and Clinical Studies Ltd. on October 15, 1997, which has been
accounted for as a pooling of interests as described in the Notes 2 and 3 to the
supplemental financial statements. Generally accepted accounting principles
proscribe giving effect to a consummated business combination accounted for by
the pooling of interests methods in financial statements that do not include the
date of consummation. These financial statements do not extend through the date
of consummation; however, they will become the historical consolidated financial
statements of PhyMatrix Corp. after financial statements covering the date of
consummation of the business combination are issued.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of PhyMatrix Corp.
as of January 31, 1997 and the consolidated results of its operations and its
cash flows for the years ended January 31, 1997 in conformity with generally
accepted accounting principles applicable after financial statements are issued
for a period which includes the date of consummation of the business
combination. Further, in our opinion, the financial statements referred to above
present fairly, in all material respects, the combined financial position of
PhyMatrix Corp. as of December 31, 1995 and the combined results of operations
and its cash flows for the year ended December 31, 1995 and December 31, 1994
in conformity with generally accepted accounting principles after financial
statements are issued for a period which includes the date of consummation of
the business combination.
Boston, Massachusetts
October 20, 1997
F-2
<PAGE>
PHYMATRIX CORP.
SUPPLEMENTAL BALANCE SHEETS
<TABLE>
<CAPTION>
Consolidated Consolidated Combined
July 31, January 31, December 31,
1997 1997 1995
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 59,383,098 $ 81,321,955 $ 7,192,367
Receivables:
Accounts receivable, net of allowances 56,581,408 41,743,737 22,920,874
Other receivables 3,440,009 2,318,395 569,923
Notes receivable (Note 4) 2,364,537 10,125,000 516,000
Prepaid expenses and other current assets 5,538,993 3,680,709 1,276,535
------------ ------------ ------------
Total current assets 127,308,045 139,189,796 32,475,699
Property, plant and equipment, net (Note 5) 40,846,212 39,128,292 39,734,091
Notes receivable (Note 4) 7,884,700 4,938,700 170,400
Goodwill, net (Note 2) 92,064,612 74,426,572 31,931,453
Management service agreements, net (Note 2) 56,078,028 40,196,102 16,376,636
Investment in affiliates (Note 6) 3,517,934 3,399,859 12,925,129
Other assets (including restricted cash) 12,600,540 12,030,884 4,853,659
------------ ------------ ------------
Total assets 340,300,071 313,310,205 138,467,067
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of debt and capital leases (Note 8) $ 3,609,281 $ 3,835,569 $ 26,707,091
Current portion of related party debt (Note 8) - - 4,740,588
Accounts payable 8,113,751 9,436,189 6,785,296
Accrued compensation 1,420,822 1,480,250 1,124,316
Accrued and other current liabilities (Note 7) 13,956,170 12,627,164 11,307,712
Accrued interest - shareholder (Note 11) - - 1,708,174
------------ ------------ ------------
Total current liabilities 27,100,024 27,379,172 52,373,177
Due to shareholder, less current portion (Notes 8 and 11) - 36,690,180
Long-term debt and capital leases, less current
maturities (Note 8) 16,882,415 14,994,690 28,952,407
Convertible subordinated debentures 100,000,000 100,000,000 -
Other long term liabilities (Notes 3 and 7) 11,759,706 14,004,143 2,511,122
Deferred tax liability (Note 14) - 1,354,182 -
Minority interest 1,854,455 1,798,321 2,502,970
------------ ------------ ------------
Total liabilities 157,596,600 159,530,508 123,029,856
Commitments and contingencies (Notes 9 and 10)
Shareholders' equity
Common stock, par value $.01, 40,000,000 shares authorized,
29,131,155, 27,625,338, and 4,885,512 shares issued
and outstanding at July 31, 1997, January 31, 1997,
and December 31, 1995, respectively 291,312 276,253 48,855
Additional paid in capital 169,856,597 150,025,403 25,071,445
Retained earnings (deficit) 12,555,562 3,478,041 (9,683,089)
------------ ------------ ------------
Total shareholders' equity 182,703,471 153,779,697 15,437,211
------------ ------------ ------------
Total liabilities and shareholders' equity $340,300,071 $313,310,205 $138,467,067
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the
supplemental financial statements.
F-3
<PAGE>
PHYMATRIX CORP.
SUPPLEMENTAL STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Consolidated Consolidated
Six Months Six Months Consolidated Combined Combined
Ended Ended Year Ended Year Ended Year Ended
July 31, July 31, January 31, December 31, December 31,
1997 1996 1997 1995 1994
------------ ----------- ------------ ----------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues from services $ 83,089,705 $ 48,139,067 $117,813,401 $61,712,559 $7,368,106
Net revenue from management service agreements 75,685,223 36,523,555 90,187,458 22,372,566 -
------------ ----------- ------------ ----------- ---------
Total revenue 158,774,928 84,662,622 208,000,859 84,085,125 7,368,106
------------ ----------- ------------ ----------- ---------
Operating costs and administrative expenses:
Cost of affiliated physician
management services 33,534,991 17,412,247 42,245,211 9,655,973 -
Salaries, wages and benefits 39,132,470 26,689,277 58,350,848 33,540,769 3,021,502
Salaries, wages and benefits - related
party (Note 11) - - - 2,267,891 934,200
Professional fees 4,254,723 3,065,137 7,321,849 4,466,897 874,412
Professional fees - related party (Note 11) - - - 273,941 253,995
Supplies 19,900,444 11,665,084 27,202,905 12,117,362 682,956
Utilities 2,107,449 1,321,822 2,868,484 1,498,755 201,639
Depreciation and amortization 4,856,994 3,313,419 7,381,666 3,955,511 166,238
Rent 7,156,746 3,836,498 8,518,812 4,642,144 361,891
Rent - related party (Note 11) - - - 459,732 192,242
Earn out payment (Note 11) - - - 1,271,000 -
Provision for closure loss (Note 7) - - - 2,500,000 -
Provision for bad debts - 1,320,777 4,607,888 744,111 -
Other 33,198,534 6,797,839 26,359,859 9,797,589 1,729,380
Other - related party (Note 11) - - - 728,116 249,316
------------ ----------- ------------ ----------- ---------
144,142,351 75,422,100 184,857,522 87,919,791 8,667,771
------------ ----------- ------------ ----------- ---------
Interest expense, net 1,673,963 392,973 1,357,210 3,120,056 95,774
Interest expense shareholder (Note 11) - 369,366 369,366 1,708,174 -
(Income) loss from investment in affiliates (412,985) (268,998) (709,295) (569,156) -
------------ ----------- ------------ ----------- ---------
1,260,978 493,341 1,017,281 4,259,074 95,774
------------ ----------- ------------ ----------- ---------
Income (loss) before provision for income taxes 13,371,599 8,747,181 22,126,056 (8,093,740) (1,395,439)
Income tax expense 4,545,904 3,031,881 6,836,066 - -
------------ ----------- ------------ ----------- ---------
Net income (loss) (Note 2) $ 8,825,695 $ 5,715,300 $ 15,289,990 $(8,093,740) $(1,395,439)
============ ========== =========== =========== ===========
Net income per weighted average share $ 0.30 $ 0.21 $ 0.55
Proforma Information (Note 2):
Adjustment to income tax expense $ 251,792 $ 261,116 $ 1,293,385
Net income $ 8,573,903 $ 5,454,184 $ 13,996,605
Net income per weighted average share $ 0.29 $ 0.20 $ 0.51
Weighted average shares outstanding 29,152,416 26,776,563 27,703,073
============ ============ ============
</TABLE>
F-4
The accompanying notes are an integral part of the
supplemental financial statements.
<PAGE>
PHYMATRIX CORP.
SUPPLEMENTAL STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the six months ended July 31, 1997 (unaudited)
and the years ended January 31, 1997, December 31, 1995 and December 31, 1994
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings
Outstanding Paid-in (Accumulated
Shares Amount Capital Deficit) Total
------ ------ ---------- ------------ -----
<S> <C> <C> <C> <C> <C>
Balances - January 1, 1994, as
previously reported - $ - $ - $ - $ -
Pooling of interests with CSL (as
defined in Note 1) 4,885,512 48,855 $ 71,445 26,090 146,390
Capital Contribution - - 12,963,713 - 12,963,713
Net loss for the year ended
December 31, 1994 - - - (1,395,439) (1,395,439)
---------- --------- ------------ ------------ ------------
Balances - December 31, 1994 4,885,512 48,855 13,035,158 (1,369,349) 11,714,664
Capital contribution - - 12,036,287 - 12,036,287
Net loss for the year ended
December 31, 1995 - - - (8,093,740) (8,093,740)
Dividends - - - (220,000) (220,000)
---------- --------- ------------ ------------ ------------
Balances - December 31, 1995 4,885,512 48,855 25,071,445 (9,683,089) 15,437,211
Initial Public Offering,
net of costs 21,263,284 212,633 111,494,224 - 111,706,857
Issuance of common stock
for acquisitions 266,666 2,667 3,997,333 - 4,000,000
Issuance of stock pursuant to
pooling of interests with CSL 318,793 3,188 624,452 - 627,640
Adjustment for immaterial pooling
of interests 432,645 4,326 - 778,960 783,286
Issuance Costs - - (743,316) (743,316)
Issuance of stock pursuant
to acquisitions 406,272 4,062 9,222,977 - 9,227,039
Issuance of stock pursuant
to stock plans 52,166 522 358,288 - 358,810
Net loss for the month ended
January 31, 1996 - - - (1,176,228) (1,176,228)
Net income for the year ended
January 31, 1997 - - - 15,289,990 15,289,990
Dividends - - - (1,731,592) (1,731,592)
---------- --------- ------------ ------------ ------------
Balances - January 31, 1997 27,625,338 276,253 150,025,403 3,478,041 153,779,697
Adjustment for immaterial pooling
of interests - - - 644,326 644,326
Effect of CSL's excluded activity
(as described in Note 2) - - - 344,700 344,700
Issuance of stock pursuant to
acquisitions 1,435,818 14,359 19,251,281 - 19,265,640
Issuance of stock pursuant
to stock plans 69,999 700 656,275 - 656,975
Issuance costs - - (76,362) (76,362)
Net income for the six months
ended July 31, 1997 - - - 8,825,695 8,825,695
Dividends - - - (737,200) (737,200)
---------- --------- ------------ ------------ ------------
Balances - July 31, 1997 29,131,155 $ 291,312 $169,856,597 $ 12,555,562 $182,703,471
========== ========= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the
supplemental financial statements.
F-5
<PAGE>
PHYMATRIX CORP.
SUPPLEMENTAL STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Consolidated Consolidated
Six Months Six Months Consolidated Combined Combined
Ended Ended Year Ended Year Ended Year Ended
July 31, July 31, January 31, December 31, December 31,
1997 1996 1997 1995 1994
------------ ----------- ------------ ------------ -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 8,825,695 $ 5,715,300 $ 15,289,990 $ (8,093,740) $(1,395,439)
Noncash items included in net income (loss):
Depreciation and amortization 4,856,994 3,313,419 7,381,666 3,955,511 166,238
Amortization of debt issuance costs - - 276,625 - -
Writedown of assets - - - 1,554,607 -
Issuance of common stock as compensation - 627,640 627,640 - -
Other (626,401) 19,252 (650,940) 140,151 -
Changes in receivables (11,055,818) (8,289,561) (14,154,057) (7,415,851) (418,869)
Changes in accounts payable and accrued
liabilities (2,310,415) (2,014,310) (4,642,545) 11,235,272 231,417
Changes in other assets (1,755,154) (1,888,510) 1,517,672 (1,511,032) 2,473
------------ ----------- ------------ ------------ -----------
Net cash provided (used) by
operating activities (2,065,099) (2,516,770) 5,646,051 (135,082) (1,414,180)
Cash flows from investing activities:
Capital expenditures (2,855,448) (1,750,859) (5,686,484) (1,378,630) (181,264)
Sale of assets 1,490,000 - 1,243,762 - -
Notes receivable, net 4,689,463 (250,000) (15,213,700) (686,400) 160,000
Purchase of investments in affiliates - - - (9,790,588) (2,661,511)
Other assets (605,490) (84,285) (1,440,176) (20,287) -
Acquisitions, net of cash acquired (Note 15) (22,250,306) (6,980,003) (27,734,210) (44,365,741) (8,183,902)
------------ ----------- ------------ ------------ -----------
Net cash used by investing
activities (19,531,781) (9,065,147) (48,830,808) (56,241,646) (10,866,677)
Cash flows from financing activities:
Capital contributions - - - 12,036,287 12,963,713
Borrowings under revolving line of credit, net 1,000,000 - 3,132,300 - -
Advances from (repayment to) shareholders - (15,446,759) (15,523,287) 36,690,180 -
Proceeds from issuance of common stock 649,727 205,000 359,614 200 -
Dividends to stockholders (737,200) (1,243,998) (1,731,592) (220,000) -
Proceeds from issuance of convertible
subordinated debentures (114,281) 97,102,738 96,565,758 - -
Proceeds from issuance of debt 361,449 - - 19,143,127 -
Release of cash collateral 480,182 1,537,282 1,996,786 - -
Offering costs and other (618,658) (2,344,363) (2,823,130) (1,030,632) -
Repayment of debt (1,691,136) (5,486,414) (7,178,810) (3,834,714) (96,676)
----------- ----------- ----------- ----------- ----------
Net cash provided (used) by
financing activities (669,917) 74,323,486 74,797,639 62,784,448 12,867,037
Increase in cash and cash equivalents (22,266,797) 62,741,569 31,612,882 6,407,720 586,180
Cash and cash equivalents, beginning of period 81,649,895 49,709,073 49,709,073 784,647 198,467
------------ ----------- ----------- ---------- ----------
Cash and cash equivalents, end of period $ 59,383,098 $ 112,450,642 $ 81,321,955 $ 7,192,367 $ 784,647
============= ============ ============ ========== ==========
</TABLE>
The accompanying notes are an integral part of the
supplemental financial statements.
F-6
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
1. Description of Business and Organization
PhyMatrix Corp. ("the Company") is a multispecialty physician management
company that provides management services to the medical community. PhyMatrix
also develops medical malls, medical office buildings, and health parks, both
for its own account and for leading hospitals and health systems.
PhyMatrix Corp., 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 and simultaneously exchanged 13,040,784
shares of its Common Stock for all of the outstanding Common Stock of several
business entities (the "IPO entities") which were operated under common control
prior to the offering by Abraham D. Gosman, and with respect to DASCO
Development Corporation and affiliate (collectively, "DASCO"), by Mr. Gosman,
Bruce A. Rendina and Donald A. Sands (collectively, the Principal Shareholders
of the Company), since their respective dates of acquisition. Subsequent to the
offering, the Company changed its fiscal year end from December 31 to January
31.
During October 1997, a subsidiary of the Company merged with Clinical
Studies Ltd. ("CSL"). This business combination was accounted for as a pooling
of interests. CSL is a site management organization conducting clinical research
for pharmaceutical companies and clinical research organizations at 22 centers
located in 11 states. Accordingly, the financial statements for all periods
prior to the effective date of the merger have been restated to include CSL and
Clinical Marketing Ltd. ("CML") which was merged into CSL on January 1, 1997.
Prior to the offering, each of the acquisitions of the business entities,
except where otherwise noted, was accounted for under the purchase method of
accounting and was recorded at the price paid by companies controlled by Mr.
Gosman when they purchased the entities from third parties. The audited combined
financial statements for the years ended December 31, 1994 and December 31, 1995
have been prepared to reflect the combination of these business entities which
have operated since their purchase date under common control. Because certain of
these entities operated under common control were nontaxpaying (i.e., primarily
S corporations, which results in taxes being the responsibility of the
respective owners), the financial statements for the years ended December 31,
1994 and December 31, 1995 have been presented on a pretax basis, as further
described in Note 2.
The Company filed a Registration Statement on Form S-1 with the Securities
and Exchange Commission in connection with the offering which became effective
January 23, 1996. In connection with the offering, the Company issued 8,222,500
shares of Common stock. As of January 31, 1997, net proceeds to the Company were
$110,963,541, which was net of underwriting discounts and commissions and
offering expenses. The Company used approximately $71,500,000 from the net
proceeds of the offering to repay certain indebtedness and obligations that
arose from certain acquisitions. The remaining net proceeds have and will
continue to be used for general corporate purposes, including future
acquisitions and working capital.
During June 1996, the Company raised $100 million through the sale of its
6-3/4% Convertible Subordinated Debentures (the "Debentures") to certain
institutional investors and non-U.S. investors. The Debentures are convertible
into shares of the Company's Common Stock at a conversion price of $28.20 per
share, and are due in 2003. As of January 31, 1997, net proceeds to the Company
from the Debentures, after deduction of the initial purchasers' discounts and
commissions and offering expenses, were $96,565,758. The Company used
approximately $10,752,000 from the net proceeds of the Debenture offering to
repay advances from the principal shareholder. During July 1996, the Company
filed a Registration Statement on Form S-1 with the Securities and Exchange
Commission to register the resale of the Debentures by the holders thereof.
During July 1996, the Company also filed a Registration Statement on Form
S-4 with the Securities and
F-7
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
Exchange Commission with respect to the registration of an aggregate of up to
5,000,000 shares of Common Stock which may be issued by the Company from time to
time in connection with various acquisitions that it may make.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its 50% or greater owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
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 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 equals the net revenue
generated by the physician practices. Under the agreements, the Company is
responsible and at risk for the operating costs. The costs include the
reimbursement of all medical practice operating costs and payments to physicians
(which are reflected as cost of affiliated physician management services).
Net revenues from clinical studies equals the fees to be received as
services are provided to patients enrolled in the studies. Revenues are
recognized as patient visits are conducted and such services are provided.
Payments received prior to providing services are recorded as unearned revenue.
Included in accounts receivable at January 31, 1997 and December 31, 1995 are
unbilled contract receivables of $5,497,469 and $2,210,028, respectively.
Net revenues from medical facility development are recognized at the time
services are performed. In some cases fees are earned upon the achievement of
certain milestones in the development process, including the receipt of a
building permit and a certificate of occupancy of the building. Unearned revenue
relates to all fees received in advance of services being completed on
development projects.
F-8
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
Accounting Developments
The Emerging Issues Task Force (the "Task Force") of the Financial
Accounting Standards Board has added an agenda item to review various accounting
and reporting matters relating to the physician practice management industry.
Among other things, the Task Force plans to address the consolidation of
revenues of professional associations and accounting for business combinations.
Although the company believes that its accounting and reporting practices are in
conformity with generally accepted accounting principles and common industry
practice, there can be no assurance that the conclusions reached by the Task
Force will not have a material impact on the Company.
Third Party Reimbursement
For the years ended January 31, 1997, December 31, 1995, and December 31,
1994, approximately 31%, 34%, and 11%, 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.
Contract Receivables
The Company's businesses could be impacted by the failure of key customers,
increasing competition in the pharmaceutical drug testing industry, federal and
state legislation in the area of pharmaceutical drug testing industry, federal
and state legislation in the area of pharmaceutical drug testing and the
departure of key trial investigators. Also, for a number of clinical trial
programs, the Company believes that the industry protocols have resulted in
final settlement of contract receivables being prolonged due to delays in the
finalization of the testing program and data analysis. Changes in these areas
could adversely impact the Company's operations in the future.
Property and Equipment
Additions are recorded at cost, or in the case of capital lease property at
the lower of fair market value at the inception of the lease or the present
value of the minimum lease payments required, 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 the shorter of their estimated useful lives or
the lease terms.
Income Taxes
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Deferred taxes arise
primarily from the recognition of revenues and expenses in different periods for
income tax and financial reporting purposes.
Prior to the offering, certain of the entities subsequently purchased by
the Company were S Corporations or partnerships; accordingly, income tax
liabilities were the responsibility of the respective owners or partners.
F-9
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
Provisions for income taxes and deferred assets and liabilities of the taxable
entities were not reflected in the combined financial statements prior to the
offering since there was no taxable income on a combined basis.
Prior to the CSL merger, CSL was treated as a S corporation under the
Internal Revenue Code (the "Code") and its stockholders recognized its income
for income tax purposes. Accordingly, the Company's statements of operations do
not include provisions for income taxes for income related to CSL. Prior to the
CSL merger, dividends were paid primarily to reimburse stockholders for income
tax liabilities incurred.
Pro Forma Information
The pro forma net income and net income per share information in the
consolidated statement of operations reflect the effect on historical results as
if CSL had been a C corporation rather than a S corporation and had paid income
taxes.
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 40 years. Accumulated amortization of goodwill was
$2,771,727 and $840,928 at January 31, 1997 and December 31, 1995, respectively.
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 ten to 40 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 agreements, at the then net book value. Accumulated
amortization of management service agreements was $1,640,765 and $254,741 at
January 31, 1997 and December 31, 1995.
Debt Issuance Costs
Offering costs of approximately $3,434,242 related to the Debentures have
been deferred and are being amortized over the life of the Debentures.
Amortization expense of $276,625 has been included as interest expense in the
accompanying financial statements for the year ended January 31, 1997.
Long-Lived Assets
The Company periodically assesses the recoverability of long-lived assets,
including property and equipment and intangibles, when there are indications of
potential impairment, based on estimates of undiscounted future cash flows. The
amount of impairment is calculated by comparing anticipated discounted future
cash flows with the carrying value of the related asset. In performing this
analysis, management considers such factors as current results, trends and
future prospects, in addition to other economic factors.
F-10
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
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.
Net Income (Loss) Per Common Share
Net income (loss) per common share is calculated based on net income (loss)
divided by the weighted average number of common shares outstanding during the
year.
Stock Option Plans
On February 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation", which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made during the
year ended January 31, 1997 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
Accounting Developments
During 1997, the Financial Accounting Standards Board issued FASB Statement
No. 128, "Earnings Per Share". This standard is designed to improve the Earnings
Per Share ("EPS") information provided in financial statements by simplifying
the existing computational guidelines, revising the disclosure requirements and
increasing the comparability of EPS data on an international basis. The Company
will implement the new standard in its fiscal year ending January 31, 1998.
Management believes that the Company's adoption of this Standard, when
effective, will not have a significant impact on the Company's financial
statements.
Unaudited Financial Statements
The financial statements for the six months ended July 31, 1997 and 1996
are unaudited and include all adjustments which are, in the opinion of
management, necessary for a fair statement of the results for the interim
periods. The interim results for the six months ended July 31, 1997 are not
necessarily indicative of results to be expected for the year ended January 31,
1998.
Fiscal Year
Upon the completion of the merger during October 1997, CSL changed its
fiscal year end from December 31 to January 31. Amounts consolidated for CSL
during the six months ended July 31, 1996 and the year ended January 31, 1997
were based on a December 31 fiscal year end. As a result, CSL's historical
results of operations for the month ending January 31, 1997 are not included in
the Company's consolidated statements of operations or cash flows.
Restatement of Financial Statements
The supplemental consolidated financial statements of the Company have been
prepared to give retroactive effect to the merger with CSL on October 15, 1997.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling of interests
methods in financial statements that do not include the date of consummation;
however, they will become the historical consolidated financial
F-11
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
statements of PhyMatrix after financial statements covering the date of
consummation of the business combination are issued.
Reclassifications
Certain prior year balances have been reclassified to conform with the
current year presentation.
3. Acquisitions
The following table sets forth the acquisitions completed by the Company
during the year ended January 31, 1997 with the respective purchase dates,
purchase prices and amounts allocated to intangibles. Each of the acquisitions
was accounted for under the purchase method of accounting, except where noted
otherwise.
<TABLE>
<CAPTION>
Amounts
Allocated
to Intangibles
-----------------------
Management
Date Purchase Service
Business Acquired Purchased Price Goodwill Contracts
- ----------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Employed physicians......................... Various $ 3,213,399 $ 2,862,035 $ --
Managed Physician Practices:
o Atlanta Gastroenterology.................. May 1996 6,100,000 -- --
o Oncology Care Associates.................. May 1996 609,124 -- 609,124
o Busch..................................... May 1996 787,864 -- 457,772
o Dal Yoo................................... June 1996 426,427 -- 291,874
o Koerner, Taub & Flaxman................... July 1996 948,610 -- 328,838
o Atlanta Metro Urology..................... July 1996 755,163 -- 399,974
o Atlantic Pediatrics....................... August 1996 412,539 -- 328,074
o Insignia Care for Women, P.A.............. August 1996 3,439,331 -- 2,625,699
o Georgia Surgical Associates, P.C.......... August 1996 1,548,756 -- 1,116,259
o Ankle & Foot Center of Tampa Bay, P.A..... August 1996 3,294,499 -- 3,161,192
o Boynton GI Group.......................... October 1996 1,341,521 -- 670,000
o Atlanta Specialists in Gastroenterology... January 1997 1,578,205 -- --
o American Regional Health Center........... January 1997 6,029,272 -- 4,640,493
o Access Medical Care....................... January 1997 4,500,652 -- 3,814,400
Medical Support Services:
o Clinical Research Specialists............. August 1996 521,025(B) 521,025 -
o Delaware Valley Clinical Studies.......... October 1996 6,850,000(B) 6,850,000 -
o Outpatient Center of Boynton Beach, LTD... October 1996 4,755,255 -- 2,597,409
Management Services Organizations
and Contract Management:
o Physicians Choice Management, LLC......... December 1995 12,148,822 12,099,111 --
o Central Georgia Medical Management, LLC... April 1996 673,262 1,023,261 --
o New Jersey Medical Management, LLC........ September 1996 454,168 541,668 --
o Physicians Consultant and Management...... September 1996 2,000,000(A) 3,078,568 --
Corporation
o New York Network Management, LLC.......... November 1996 1,258,861 2,661,800 --
- ---------------
</TABLE>
(A) In addition to the base purchase price, there is a contingent payment up to
a maximum of $10,000,000 based on the earnings before taxes during the next
five years.
(B) In addition to the base purchase price, there is a contingent payment based
on earnings before taxes over the next five years.
F-12
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
Year Ended January 31, 1997 and the Six Months Ended July 31, 1997 Acquisitions
Physician Practice Acquisitions
Between April and June 1996, the Company purchased the assets of and
entered into employment agreements with Drs. Lawler, Cutler and Surowitz. The
total purchase price for these assets was $2,154,999 in cash and 69,799 shares
of Common Stock of the Company were issued during July 1997 having a value of
$1,058,400. The value of the Common Stock issued had been recorded in other
long-term liabilities at January 31, 1997. The purchase price has been allocated
to the assets at their fair market value including goodwill of $2,862,035. The
resulting goodwill is being amortized over 20 years.
During May 1996, the Company purchased the stock of Atlanta
Gastroenterology Associates, P.C. pursuant to a tax free merger and entered into
a 40-year management agreement with the medical practice in exchange for 324,252
shares of Common Stock of the Company having a value of approximately
$6,100,000. The transaction has been accounted for using the
pooling-of-interests method of accounting.
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 whose practices of whom the Company acquired for
$609,124. $309,124 of such purchase price was paid in cash and 20,684 shares of
Common Stock of the Company were issued in July 1997 having a value of $300,000.
The purchase price has been allocated to the assets at their fair market value,
including management service agreements of approximately $609,124. The resulting
intangible is being amortized over 20 years.
During May and June 1996, the Company entered into agreements to purchase
the assets of and entered into 20-year management agreements with two physician
practices consisting of three physicians. These practices are located in South
Florida and Washington, D.C. The total purchase price for the assets of these
practices was $1,214,291. Of this amount, $663,667 was paid in cash and 29,350
shares of Common Stock of the Company were issued during May and June 1997
having a value $550,954. The value of the Common Stock issued had been recorded
in other long-term liabilities at January 31, 1997. The purchase price has been
allocated to the assets at their fair market value, including management service
agreements of $749,646. The resulting intangible is being amortized over 20
years.
During July 1996, the Company purchased the assets of and entered into a
20-year management agreement with four physicians in Florida. The purchase price
for these assets was approximately $948,610, which was paid in cash. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $328,838. The resulting intangible is
being amortized over 20 years.
During July 1996, the Company purchased the assets of and entered into a
20-year management agreement with three urologists in Atlanta, Georgia. The
purchase price for these assets was $755,163. Of such purchase price, $475,163
was paid in cash and 18,064 shares of Common Stock of the Company were issued
during July 1997 having a value of $280,000. The value of the Common Stock
issued had been recorded in other long-term liabilities at January 31, 1997. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of approximately $399,974. The resulting
intangible is being amortized over 20 years.
During August 1996, the Company purchased the assets of and entered into a
management agreement with Atlantic Pediatrics. The purchase price for these
assets was $412,539. Simultaneous with the closing, Atlantic Pediatrics was
merged into Osler Medical, Inc. During the second quarter of 1996, the Company
also acquired
F-13
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
certain copyright and trademark interests for a purchase price of $887,000. The
total purchase price for the assets acquired was allocated to such assets at
their fair market value, including management service agreements of $1,215,074.
The resulting intangible is being amortized over 20 years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with eight physicians in Florida. The purchase
price for these assets was $3,439,331. Of such purchase price, $1,519,331 was
paid in cash and 122,841 shares of Common Stock of the Company were issued
during August 1997 having a value of $1,920,000. The value of the Common Stock
issued had been recorded in other long-term liabilities at January 31, 1997. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $2,625,699. The resulting intangible
is being amortized over 40 years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with four physicians in Georgia. The purchase price
for these assets was $1,548,756. Of such purchase price, $855,956 was paid in
cash and 44,126 shares of Common Stock of the Company were issued during August
1997 having a value of $692,800. The value of the Common Stock issued had been
recorded in other long-term liabilities at January 31, 1997. The purchase price
has been allocated to these assets at their fair market value, including
management service agreements of $1,116,259. The resulting intangible is being
amortized over 40 years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with 10 physicians in Florida. The purchase price
for these assets was $3,294,499. Of such purchase price, $920,099 was paid in
cash and 192,649 shares of Common Stock of the Company were issued during
September 1997 having a value of $2,374,400. The value of the Common Stock
issued had been recorded in other long-term liabilities at January 31, 1997. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $3,161,192. The resulting intangible
is being amortized over 40 years.
During October 1996, the Company purchased the assets of and entered into
20-year management agreements with five physicians in Florida. The purchase
price for these assets was $1,341,521. Of such purchase price $806,521 was paid
in cash and 33,331 shares of Common Stock of the Company were issued during
October 1997 having a value of $535,000. The value of the Common Stock issued
had been recorded in other long-term liabilities at January 31, 1997. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $670,000. The resulting intangible is
being amortized over 20 years.
During January 1997, the Company purchased the stock of Atlanta Specialists
in Gastroenterology pursuant to a merger and entered into a 40-year management
agreement with the medical practice in exchange for 108,393 shares of Common
Stock of the Company having a value of approximately $1,578,205. The transaction
was accounted for using the pooling-of-interests method of accounting.
During January 1997, the Company purchased the assets of and entered into a
40-year management agreement with 14 physicians in Texas. The purchase price for
these assets was $6,029,272. Of such purchase price,
F-14
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
$2,333,272 was paid in cash and $3,696,000 is payable during January 1998 in
Common Stock of the Company with such number of shares to be purchased based
upon the average price of the stock during the five business days prior to the
issuance. The value of the Common Stock to be issued has been recorded in other
long-term liabilities at January 31, 1997. The purchase price has been allocated
to these assets at their fair market value, including management service
agreements of $4,640,493. The resulting intangible is being amortized over 40
years.
During January 1997, the Company purchased the assets of and entered into a
40-year management agreement with 18 physicians in Florida. The purchase price
for these assets was $4,500,652. Of such purchase price, $2,273,613 was paid in
cash, $1,500,000 of bank debt was assumed and 42,830 shares of Common Stock were
issued having a value of $727,039. The purchase price has been allocated to
these assets at their fair market value, including management service agreements
of $3,814,400. The resulting intangible is being amortized over 40 years.
During February 1997, the Company purchased the stock of a six physician
practice pursuant to a merger and entered into a 40-year management agreement
with the practice in exchange for 159,312 shares of Common Stock of the Company
having a value of approximately $2,440,000. The transaction has been accounted
for using the pooling-of-interests method of accounting.
During February 1997, the Company purchased the assets of and entered into
a 40-year management agreement with five physicians in Utah. The purchase price
was $2,498,148. Of such purchase price, $1,378,148 was paid in cash and 75,293
shares of Common Stock of the Company were issued having a value of $1,120,000.
The purchase price was allocated to the assets at their fair market value,
including management service agreements of $1,499,013. The resulting intangible
is being amortized over 40 years.
During May 1997, the Company entered into a 40-year management agreement
with a radiation therapy center in Westchester, New York. The purchase price was
$2,550,000. Of such purchase price $1,200,000 was paid in cash and $1,350,000 is
payable during May 1998 in Common Stock of the Company with such number of
shares to be issued based upon the average price of the stock during the five
business days prior to the issuance. The value of the Common Stock to be issued
has been recorded in other long-term liabilities at July 31, 1997. The purchase
price has been allocated to management service agreements and is being amortized
over 40 years.
During July 1997, the Company entered into a management services agreement
with Beth Israel Hospital to manage its DOCS Division which consists of more
than 100 physicians located throughout the greater Metropolitan New York area.
In addition, the Company and Beth Israel Hospital will be completing the
formation of an MSO to manage the medical risk contracting to the more than
2,000 physicians affiliated with Beth Israel Hospital and its parent
corporation. The Management Services Agreement became effective July 1, 1997,
and will remain in effect for 40 years contingent upon the closing of the MSO
joint venture prior to January 15, 1998. The Company has committed up to $40
million in conjunction with the transaction to be utilized for the expansion of
the Beth Israel delivery system throughout the New York region. In connection
with the agreement, the Company paid $13,560,000 in cash, which was allocated to
management service agreements and is being amortized over 40 years.
Medical Support Services Companies Acquisitions and CSL Merger
Acquisitions
During August 1996, the Company acquired the business and certain assets of
a single site clinical research company in Sarasota, Florida for $300,000 plus
contingent consideration based on profitability measures over the next five
years. The purchase price consisted of $100,000 of cash and the issuance of two
subordinated promissory notes of $100,000 each. The contingent payments will
equal 15% of the increase in adjusted income before tax, of the acquired
business, over the prior year's amount. The contingent payments will not be less
than $221,025. The full amount of the minimum payments was accrued for at the
date of the acquisition. During October 1996, the Company acquired the business
and certain assets of a multi-site clinical research company in Pennsylvania for
$6,850,000 plus contingent consideration based on profitability measures over
the next five years. The purchase price consisted of $3,100,000 of cash and the
issuance of two subordinated promissory notes of $2,000,000 and $1,750,000,
respectively. The contingent payments will equal 15% of the excess of adjusted
income before tax over $2,000,000 per year for five years. The cost of these
acquisitions was allocated on the basis of the estimated fair value of the
assets acquired and the liabilities assumed. This allocation resulted
F-15
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
in goodwill of $6,966,000, noncompete agreements of $355,000 and trained
workforces of $50,000. The notes mentioned above are convertible into shares of
Common Stock.
During October 1996, the Company purchased the assets of an outpatient
ambulatory surgical center in Florida. The Company entered into a lease under
which the surgical center was leased to a partnership with an initial term of 15
years. In addition, the Company entered into a 20-year management agreement
pursuant to which the Company receives a management fee which is based upon the
performance of the surgical center. The purchase price for these assets was
$3,531,630 plus the assumption of debt of $1,223,625 which consisted of $717,557
in a mortgage payable and $506,068 in capital leases. The purchase price has
been allocated to the assets at their fair market value, including management
service agreements of $2,597,409. The resulting intangible is being amortized
over 20 years.
During April 1997, the Company acquired the business and certain assets of
a clinical research company in the Washington, D.C. area for $725,000 in the
form of a promissory note plus contingent consideration based on revenue and
profitability measures over the next five years. The contingent payments will
equal 10% of the excess gross revenue, as defined, provided the gross operating
margins of the acquired business exceed 30%. The purchase price was allocated to
goodwill and is being amortized over years. The note and contingent payments
are, in certain circumstances, convertible into shares of Common Stock.
During June 1997, the Company purchased the assets of two diagnostic
imaging centers in Dade County, Florida. The purchase price was approximately
$12,500,000 plus the assumption of debt and capital leases totaling $1,570,078.
Of such purchase price, $500,000 was paid in cash and the remaining $12,000,000
was paid by the issuance of 773,026 shares of Common Stock of the Company,
562,500 of which were issued in June and 210,526 of which were issued in
September. The purchase price was allocated to the assets at their fair market
value, including goodwill of $10,180,273. The resulting intangible is being
amortized over 30 years.
During June 1997, the Company acquired the remaining 20% interest in a
lithotripsy company that it purchased during 1994. The interest was acquired in
exchange for cash and 54,500 shares of Common Stock of the Company having a
total value of $2,005,000. The purchase price was allocated to goodwill and is
being amortized over 20 years.
During June 1997, the Company issued 100,002 shares of Common Stock of the
Company having a value of approximately $1,500,000 to the former shareholders of
Pinnacle Associates, Inc. ("Pinnacle"). The issuance of the shares represented
the merger consideration for Pinnacle which was purchased during 1995.
CSL Merger
Effective October 15, 1997, a subsidiary of the Company merged with CSL in
a transaction that was accounted for as a pooling of interests. The Company
exchanged 5,204,305 shares of its common stock for all of the outstanding common
stock of CSL. The Company's historical financial statements for all periods have
been restated to include the results of CSL.
The following table reflects the combined revenues, net income, net income
per share and weighted average number of shares outstanding for the respective
periods. The Pro forma Combined column adjusts the historical net income for CSL
to reflect the results of operations as if CSL had been a C corporation rather
than an S corporation for income tax purposes. The Adjusted Pro forma Combined
column adjusts the Pro Forma Combined column by eliminating certain
noncontinuing charges incurred by CSL. Provisions for income taxes have not been
reflected for the years ended December 31, 1994 and 1995 because there is no
taxable income on a combined basis.
F-16
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
<TABLE>
<CAPTION>
Adjusted
Pro forma Pro forma
PhyMatrix CSL Combined Combined
------------ ------------ ------------- ------------
For the six months ended July 31, 1997
---------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $145,646,752 $13,128,176 $158,774,928 $158,774,928
Net Income $ 8,196,216 $ 377,687 $ 8,573,903 $ 9,118,103
Net Income per weighted
average share $ 0.34 $ 0.07 $ 0.29 $ 0.31
Weighted average number of
shares outstanding 23,863,289 5,289,127 29,152,416 29,152,416
For the six months ended July 31, 1996
---------------------------------------------------------
Revenue $ 77,631,077 $ 7,031,545 $ 84,662,622 $ 84,662,622
Net Income $ 5,062,509 $ 391,675 $ 5,454,184 $ 5,965,984
Net income per weighted
average share $ 0.23 $ 0.07 $ 0.20 $ 0.22
Weighted average number of
shares outstanding 21,689,631 5,086,932 26,776,563 26,776,563
For the year ended January 31, 1997
---------------------------------------------------------
Revenue $189,960,735 $18,040,124 $208,000,859 $208,000,859
Net Income $ 12,056,531 $ 1,940,074 $ 13,996,605 $ 15,154,005
Net income per weighted
average share $ 0.54 $ 0.37 $ 0.51 $ 0.55
Weighted average number of
shares outstanding 22,511,448 5,191,625 27,703,073 27,703,073
For the year ended December 31, 1995
---------------------------------------------------------
Revenue $ 70,733,282 $13,351,843 $ 84,085,125 $ 84,085,125
Net Income $(11,024,915) $ 2,931,175 $ (8,093,740) $ (5,960,740)
For the year ended December 31, 1994
---------------------------------------------------------
Revenue $ 2,446,821 $ 4,921,285 $ 7,368,106 $ 7,368,106
Net Income $ (1,296,737) $ (98,702) $ (1,395,439) $ (473,439)
</TABLE>
F-17
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
The following items reflect the noncontinuing charges, referred to above,
incurred by CSL during the respective periods:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
----------------------------------------------- -------------------------------
December 31, December 31, December 31, June 30, July 31,
1994 1995 1996 1996 1997
----------- ------------ ------------ ------------ -----------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Salaries expense related to the $ - $ - $ 628,000 $ - $ -
equity interest granted to an
officer of CSL. During January
1997, the officer entered into an
employment agreement with no
provisions for sharing of profits
or proceeds.
Consulting fees based on a profit 120,000 433,000 314,000 145,000 -
sharing arrangement. The profit
sharing arrangement was
terminated during 1997.
Management fees paid to the 802,000 1,700,000 987,000 708,000 907,000
principal shareholders of CSL
--------- ----------- ---------- ------------ -----------
Total nonrecurring items 922,000 2,133,000 1,929,000 853,000 907,000
After tax impact of nonrecurring $ 922,000 $ 2,133,000 $1,157,400 $ 511,800 $ 544,200
items
</TABLE>
Prior to its merger with the Company, CSL reported on a fiscal year ending
December 31. Prior to its initial public offering during January 1996, the
Company reported on a fiscal year ending December 31. The fiscal year end of the
Company was changed to January beginning with the one month period ended January
31, 1996. The restated financial statements for the year ended January 31, 1997
are based on a combination of the Company's results for its January 31 fiscal
year and a December 31 fiscal year for CSL. CSL's historical results of
operations for the month ending January 31, 1997 are not included in the
Company's consolidated statements of operations or cash flows. An adjustment has
been made to stockholder's equity as of February 1, 1997 to adjust for the
effect of excluding CSL's results of operations for the month ending January 31,
1997.
As a result of using the pooling of interests method of accounting,
estimated transaction expenses of $10,150,000 will be recorded as a one-time
charge to the Company's statement of operations during the quarter ended October
31, 1997, which is the period in which the transaction closed. A summary of
these estimated expenses is as shown below:
<TABLE>
<CAPTION>
CSL PhyMatrix Total
---------- --------- ----------
<S> <C> <C> <C>
Legal $ 200,000 $300,000 $ 500,000
Accounting 200,000 175,000 375,000
Investment Banking 3,600,000 325,000 3,925,000
Other 250,000 100,000 350,000
---------- -------- -----------
Subtotal transaction expenses 4,250,000 900,000 5,150,000
---------- -------- -----------
CNS Consulting (1) 5,000,000 0 5,000,000
---------- -------- -----------
Total $9,250,000 $900,000 $10,150,000
---------- -------- -----------
</TABLE>
(1) Represents buyout of consulting contract.
F-18
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
Management Services Organizations and Contract Management Acquisitions
During December 1995, the Company obtained a 43.75% interest in Physicians
Choice Management, LLC, an MSO that provides management services to an IPA
composed of over 375 physicians based in Connecticut. The Company acquired this
interest in exchange for a payment of $1.5 million to the MSO's shareholders
($1.0 million paid during 1995 and $.5 million paid during the second quarter of
1996) and a capital contribution of $2.0 million to the MSO ($1.5 million paid
during 1995 and $.5 million paid during the second quarter of 1996). In
addition, upon the closing of the offering, the Company granted options to
purchase 300,000 shares of Common Stock to certain MSO employees in conjunction
with their employment agreements. These options vest over a two-year period with
the exercise price equaling the fair market value of the Company's stock on the
date such shares become exercisable. During September 1996, the Company acquired
the remaining 56.25% ownership interest in the MSO. The Company acquired the
remaining interests in exchange for a payment of $1,000,000 in cash plus 363,442
shares of Common Stock of the Company. The Company also committed to loan the
MSO's selling shareholders $2,800,000 to pay the tax liability related to the
sale. As of January 31, 1997 $2,253,000 of the loan amount committed had been
advanced to the selling shareholders by the Company. The total purchase price
for the 100% interest was approximately $12,148,822 and has been allocated to
these assets at their fair market value including goodwill of $12,099,111. The
resulting intangible is being amortized over 40 years.
During April 1996, the Company purchased a 50% interest in Central Georgia
Medical Management, LLC, an 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 January
31, 1997 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 September 1996, the Company purchased an 80% interest in New Jersey
Medical Management, LLC, an MSO that provides management services to an IPA with
more than 450 physicians in New Jersey. The Company acquired this interest in
exchange for a payment of $350,000 to existing shareholders. The Company's
balance sheet at January 31, 1997 includes the 20% interest not owned by the
Company as minority interest.
During September 1996, the Company purchased the stock of Physicians
Consultant and Management Corporation ("PCMC"), a company based in Florida that
provides the managed health care industry with assistance in provider relations,
utilization review and quality assurance. The base purchase price for the stock
was $2,000,000 with $1,000,000 paid on the closing date and $1,000,000 paid
during February 1997. There is also a contingent payment up to a maximum of
$10,000,000 based on PCMC's earnings before taxes during the next five years
which will be paid in cash and/or Common Stock of the Company. The purchase
price has been allocated to the assets at their fair market value including
goodwill of approximately $3,078,568. The resulting intangible is being
amortized over 30 years.
During November 1996, the Company established New York Network Management,
L.L.C. ("Network"), which is 51% owned by the Company, to purchase the assets
and stock of various entities which comprise Brooklyn Medical Systems ("BMS").
BMS arranges for the delivery of health care services to members through
affiliations with more than 600 physicians in the New York City area. The base
purchase price for Network was $1,200,000 and an additional payment not
exceeding $1,000,000 may be required to be made during the next three years if
certain pretax earnings thresholds are achieved. The Company has committed to
fund approximately $2,400,000 to Network during the next three years. Such
advances can be in the form of a demand loan or for additional ownership
interests if the other owners do not elect to contribute their pro-rata share of
any additional capital
F-19
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
contribution ($100,000 of additional capital contribution for an additional 1%
interest) in Network. During the first three years the Company has the option to
purchase up to an additional 29% ownership interest. During years four and five
the owners of 29% of Network have the right to require the Company to purchase
their interests at the option price.
During April 1997, the Company acquired a pulmonary physician network
company for a base purchase price of $2,966,058. Of such purchase price,
$673,211 was paid in cash and 180,717 shares of Common Stock of the Company were
issued during May 1997 having a value of $2,292,847. There is also a contingent
payment up to a maximum of $2,000,000 based on the acquired entities' earnings
before taxes during the next three years which will be paid in cash and/or
Common Stock of the Company. The purchase price was allocated to management
service agreements and is being amortized over 30 years.
Year Ended December 31, 1995 Acquisitions
Physician Practice Acquisitions
During the year ended December 31, 1995, the Company purchased the assets
of several physician practices and in conjunction with those purchases entered
into employment agreements with 14 physicians in Florida. The total purchase
price for these assets was $4,158,875. The purchase price was allocated to these
assets at their fair market value, including goodwill of $3,093,946. The
resulting goodwill is being amortized over 20 years.
During the year ended December 31, 1995, the Company purchased the assets
of and entered into management service agreements with Oncology-Hematology
Associates, P.A. and Oncology-Hematology Infusion Therapy, Inc.; Georgia Cancer
Specialists, Inc.; Osler Medical, Inc.; Oncology Radiation Associates, P.A.;
West Shore Urology; Whittle, Varnell and Bedoya, P.A.; Oncology Care Associates;
Venkat Mani; and Symington, consisting of an aggregate of 79 physicians
including 45 oncologists. The total purchase price for these assets was
$23,425,190 in cash. In connection with these acquisitions, the Company also
entered into a 15-year capital lease with a total obligation of $1,569,171 and
assumed debt of $6,893,609. The purchase price for the practices' assets was
allocated to assets at their fair market value, including management service
agreements of $18,814,763. The resulting intangible is being amortized over the
life of the management agreements which range from ten to 20 years.
Medical Support Services Companies Acquisitions
During March 1995, the Company acquired by merger all of the outstanding
shares of stock of Oncology Therapies, Inc. (formerly known as Radiation Care,
Inc. and referred to herein as "OTI") for $2.625 per share. OTI owns and
operates outpatient radiation therapy centers utilized in the treatment of
cancer and diagnostic imaging centers. The total purchase price for the stock
(not including transaction costs and 26,800 shares initially subject to
appraisal rights) was approximately $41,470,207. During April 1995, the Company
purchased from Aegis Health Systems, Inc. for $7,163,126 all of the assets used
in its lithotripsy services business. During November 1995 the Company acquired
by merger Pinnacle Associates, Inc. ("Pinnacle"), an Atlanta, Georgia infusion
therapy services company. The merger consideration in connection with the
Pinnacle merger was paid in June 1997. The purchase price for these acquisitions
was allocated to assets at their fair market value including goodwill of
$19,235,818. The resulting intangibles are being amortized over 20 to 40 years.
Medical Facility Development Acquisition
On May 31, 1995, Mr. Gosman, Chairman of the Board and Chief Executive
Officer of the Company purchased a 50% ownership interest in DASCO Development
Corporation and DASCO Development West, Inc. (collectively, "DASCO"), a medical
facility development services company providing such services to related and
unrelated third parties in connection with the development of medical malls,
health parks, and medical office buildings. The purchase price consisted of $5.2
million in cash and $4.6 million in notes, which were guaranteed
F-20
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
by Mr. Gosman. Upon the closing of the Company's initial public offering,
Messrs. Gosman, Sands and Rendina, the Company's principal promoters, and
certain management and founder stockholders exchanged their ownership interests
in DASCO for shares of Common Stock equal to a total of $55 million or 3,666,667
shares. The Company believes that its medical facility development services and
project finance strategy are a significant component of the Company's overall
business strategy. The historical book value of Messrs. Sands' and Rendina's
interest in DASCO is $22,735. The initial 50% purchase price was allocated to
assets at their fair market value, primarily goodwill of $9.8 million with the
exchange recorded at historical value. At December 31, 1995, the acquisition of
the 50% interest in DASCO was being accounted for using the equity method.
Period June 24, 1994 (inception) to December 31, 1994 Acquisitions
Medical Support Services Companies Acquisitions
During September 1994, an 80% owned subsidiary of the Company purchased
substantially all of the assets of Uromed Technologies, Inc. ("Uromed"), a
provider of lithotripsy services in Florida, for a purchase price of $3,141,535
plus the assumption of capital lease obligations of $1,097,614. The Company
acquired the outstanding 20% interest in the subsidiary during June 1997. 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. 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. Subsequent to the offering, the Company acquired the
outstanding 20% interest in Nutrichem in exchange for 266,666 shares of Common
Stock resulting in additional purchase price of $4,000,000. 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 plus the assumption of $225,000 in debt. The purchase
price for these acquisitions was allocated to assets at their fair market value,
including goodwill of $14,818,145. The resulting intangibles are being amortized
over 20 to 40 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.
The accompanying financial statements include the results of operations
derived from the entities purchased by the Company since the date of
acquisition. The following unaudited pro forma information presents the results
of operations of the Company for the years ended January 31, 1997 and December
31, 1995 as if the acquisition of the entities purchased through the year ended
January 31, 1997, had been consummated on February 1, 1996 and January 1, 1995.
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 also gives effect to
both the Company's January 1996 initial public offering and the Convertible
Subordinated Debenture Offering and the application of the net proceeds
therefrom, as if such transactions had occurred on January 1, 1995.
F-21
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
The unaudited pro forma information presented below is for illustrative
informational purposes only and is not necessarily indicative of results which
would have been achieved or results which may be achieved in the future (in
thousands except per share amounts):
Pro Forma
--------------------------
January 31, December 31,
1997 1995
(unaudited) (unaudited)
----------- ------------
Revenue............................................. $245,105 $193,622
Net income (loss)................................... 13,021 1,436
Net income (loss) per share......................... $0.45 $0.05
======== ========
Number of shares used in pro forma net income
(loss) per share calculation................... 28,752 28,752
======== ========
4. Notes Receivable
During April 1995, the Company funded a tax loan in the amount of
$1,029,600 at an interest rate of 7.75% to the former shareholders of Nutrichem
which was paid in full in January 1996.
During 1996, the Company loaned $10,000,000 to an unrelated healthcare
entity. The principal and interest were repaid during May 1997. Interest on the
loan accrued at the rate of prime plus 2%.
During 1996, the Company loaned $2,253,000 to the shareholders of
Physicians Choice, LLC pursuant to the agreement under which the Company
purchased the remaining ownership interests in Physicians Choice Management, LLC
(see Note 3). The note has a variable rate of interest and a final maturity in
April 2004.
During 1996, the Company loaned an aggregate of $2,685,700 to various
entities. The notes bear interest at rates ranging from the prime rate to the
prime rate plus 1% and have final maturities ranging from November 2001 to
October 2011. The notes are revolving loan agreements with a total commitment of
$3,750,000.
5. Property and Equipment
Property and equipment consists of the following:
Estimated January 31,
Useful Life ----------- December 31,
(Years) 1997 1995
----------- ----------- ------------
Land -- $ 2,714,948 --
Building 15-20 1,569,170 $ 7,852,653
Furniture and fixtures 5-7 10,515,074 5,567,810
Equipment 5-10 24,048,121 22,075,125
Automobiles 3-5 140,926 62,816
Computer software 5 981,696 950,346
Leasehold improvements 4-20 6,823,262 6,045,393
----------- ------------
F-22
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
Property and equipment, gross 46,793,197 42,554,143
Less accumulated depreciation (7,664,905) (2,820,052)
============= ==============
Property and equipment, net $ 39,128,292 $ 39,734,091
============= ==============
Depreciation expense was $4,217,481, $2,853,992, and $129,091,
respectively, for the years ended January 31, 1997, December 31, 1995 and
December 31, 1994.
Included in property and equipment at January 31, 1997 and December 31,
1995 are assets under capital leases of $3,730,819 and $9,693,145, respectively,
with accumulated depreciation of $1,113,070 and $926,879, respectively.
6. 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 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. The
Company has the option to purchase up to an additional 30% interest in I Systems
for $33,333 in cash for each additional one percent of ownership interest
purchased. During the year ended January 31, 1997, the Company increased its
ownership interest in I Systems by two percent. These investments are being
accounted for using the equity method at January 31, 1997. During May, 1995, Mr.
Gosman purchased a 50% interest in DASCO, a medical facility development
services company, for $9,610,000. Upon the completion of the offering, the
remaining 50% interest in DASCO was purchased and DASCO has been consolidated
subsequent to the offering.
F-23
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
7. Accrued and Other Current Liabilities
Accrued and other current liabilities consist of the following:
January 31, December 31,
1997 1995
-------------- ------------
Accrued closure costs $ 570,000 $ 570,000
Accrued rent 1,141,618 799,551
Accrued income taxes 1,991,368 --
Accrued professional fees 4,502,263 445,250
Accrued additional purchase price 1,000,000 --
Accrued offering costs -- 885,770
Accrued interest 991,977 738,317
Accrued bonus payments -- 4,718,564
Unearned revenue 1,513,669 1,940,180
Other 916,269 1,210,080
============== ============
Total accrued and other current
liabilities
$12,627,164 $11,307,712
============== ============
The accrued closure costs are primarily for the remaining lease obligation
for the closure of five radiation therapy centers acquired when the Company
purchased OTI during March 1995. $1,074,013 of accrued closure costs is
classified as a long-term liability at January 31, 1997. Closure costs in the
amount of $3,134,028 were accrued at December 31, 1995. $2,188,635 of such
accrual was recorded as an adjustment to the purchase price and $945,393 of such
accrual was recorded as a charge in 1995. In addition, the Company also recorded
a charge of $1,554,607 during 1995 which represented the writedown of assets to
their estimated fair market value.
F-24
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
8. Long-term Debt, Notes Payable and Capital Leases
Long-term debt, notes payable and capital leases consist of the following:
<TABLE>
<CAPTION>
January 31, December 31,
1997 1995
------ ---------
<S> <C> <C>
Convertible subordinated debentures, with an interest rate of 6.75%
and a maturity of June 15, 2003........................................ $ 100,000,000 $ --
Note payable due to four individuals payable in eight equal
semi-annual installments of $28,125, including interest at 8%
through November 1998.................................................. 84,375 140,625
Notes payable to a bank, with a maturity date of December 2001 and an
interest rate of 8.25%................................................. 85,111 --
Note payable to an individual, payable on demand including interest
at 9%.................................................................. 6,762 --
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 January 31, 1996) 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 January 31, 1996)................. -- 400,000
Note payable to a bank, collateralized by the assets of a
multispecialty group practice, payable in monthly installments
of $14,027, including interest at 7.50% and a final payment in
February 1999.......................................................... 322,675 472,181
Note payable to a bank, collateralized by the assets of a
multispecialty group practice, payable in monthly installments
of $20,608, at 8.75% and a final payment in August 2000................. 758,335 918,779
Convertible note payable to the former shareholders of a medical
practice in Pennsylvania, with a maturity date of May 1997 and
an interest rate of 9%. The Company has the option to make such payment
in either cash or Common Stock of the Company (see Note 3).............. 300,000 --
Mortgage note payable to a bank, collateralized by the assets of an
outpatient surgery center, payable in monthly installments of
$6,627.69 including interest at 8.86% and a final maturity of
November 2001.......................................................... 712,836 --
Note payable to a bank, payable in monthly installments, interest at
the prime rate plus .375% and a final maturity of June 1998............ 1,475,000 --
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.................................................................. 4,504,184 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
Revolving bank line of credit with a maturity date of September 1999
and an interest rate at 1/4 % above the bank's base rate
(7.86% at December 31, 1996)............................................. 3,132,300 --
Convertible acquisition notes payable with various maturity dates through
August 31, 2000 and an interest rate at 7%............................... 3,950,000 --
Acquisition earnouts payable with various maturity dates through
2001 ........................................... ........................ 221,025 --
------- ------
</TABLE>
F-25
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
<TABLE>
<S> <C> <C>
Other note payable with various maturity dates through 1999 8,203 10,953
----- ------
Capital lease obligations with maturity dates through
September 2015 and interest rates ranging from
8.75% to 12%................................................ 3,269,453 9,301,327
----------- ---------
118,830,259 97,090,266
Less current portion of capital leases.......................... (889,536) (798,598)
Less current portion of debt.................................... (2,946,033) (25,908,493)
Less current portion of related party debt...................... -- (4,740,588)
----------- ----------
Long-term debt and capital leases............................... $ 114,994,690 $ 65,642,587
=========== ==========
</TABLE>
The convertible acquisition notes payable are convertible into common stock
of the Company at the option of the note holders at a conversion price of
$16.425 per share.
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
at January 31, 1997:
<TABLE>
<CAPTION>
Capital
Debt Leases
---------- ----------
<S> <C> <C>
Through January 31, 1998....................................... $ 2,946,033 $ 1,201,559
Through January 31, 1999....................................... 5,780,479 734,934
Through January 31, 2000....................................... 2,460,724 431,886
Through January 31, 2001....................................... 1,586,276 390,203
Through January 31, 2002....................................... 2,787,295 253,490
Thereafter..................................................... 100,000,000 1,861,894
----------- ---------
Total.......................................................... 115,560,807 4,873,966
Less amounts representing interest and executory costs......... -- (1,604,514)
----------- ---------
Present value of minimum lease payments........................ 115,560,807 3,269,452
Less current portion........................................... (2,946,033) (889,536)
----------- ---------
Long-term portion.............................................. $ 112,614,774 $ 2,379,916
=========== =========
</TABLE>
9. 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 January 31:
1998........................................................... $ 10,607,771
1999........................................................... 8,019,351
2000........................................................... 7,093,868
2001........................................................... 4,394,224
2002........................................................... 3,238,111
Thereafter..................................................... 5,831,463
----------
$39,184,788
==========
10. Commitments and Contingencies
The Company is subject to legal proceedings in the ordinary course of its
business. While the Company cannot estimate the ultimate settlements, if any, it
does not believe that any such legal proceedings 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.
The Company has entered into employment agreements with certain of its
employees, which include, among other terms, noncompetition provisions and
salary and benefits continuation.
F-26
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
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 Osler Medical, Inc., a
22-physician multispecialty group practice it entered into a management
agreement with in September 1995.
During 1996, the Company purchased the stock of a company based in Florida
that provides the managed health care industry with assistance in provider
relations, utilization review and quality assurance. In conjunction with this
acquisition, the Company may be required to make a contingent payment up to a
maximum of $10 million based on the acquired company's earnings before taxes
during the next five years. The payment, if required, shall be paid in cash
and/or Common Stock of the Company.
In conjunction with the acquisition of Physicians Choice Management, LLC,
the Company has committed to loan the selling shareholders $2.8 million to pay
the tax liability related to the sale. As of January 31, 1997, $2.3 million of
the loan amount committed had been advanced to the selling shareholders by the
Company.
During the year ended January 31, 1997 the Company loaned an aggregate of
$2,685,700 to various entities. The notes are revolving loan agreements with a
total commitment of $3,750,000.
In conjunction with certain of its acquisitions, the Company has agreed to
make payments in shares of Common Stock of the Company which are generally
issued one year from the closing date of such acquisitions with the number of
shares generally determined based upon the average price of the stock during the
five business days prior to the date of issuance. As of January 31, 1997 the
Company had committed to issue $11.1 million of Common Stock of the Company
using the methodology discussed above.
CSL has a profit-sharing agreement with a consultant to the Company. Such
agreement provides for payments to be made to the individual based on 10% of
income of the sites in existence at June 15, 1996, before taxes and certain
management fees paid to officers of CSL, for the year. Amounts charged to
expenses related to such agreements totaled approximately $314,000, $433,000 and
$120,000 for the year ended January 31, 1997 and the years ended December 31,
1995 and 1994, respectively. The profit sharing arrangement was terminated
simultaneous with the closing of the CLS merger during October 1997.
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. The Company has accrued the estimated costs
to defend and settle this litigation in purchase accounting.
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 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 17, 1996, the Company filed an Answer denying any liability of any defendant
in connection with this litigation. All discovery in the Delaware
F-27
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
action, except for expert and class certification related discovery, is now
complete. On January 10, 1997, the Company filed a Motion for Summary Judgment
seeking dismissal of all plaintiffs' claims. An agreement in principal was
reached in May to settle the case, subject to court and class approval, and
definitive settlement documents are being prepared.
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/or 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).
Early on in the litigation two of the plaintiffs withdrew from the litigation,
and during the deposition phase of the case, two more plaintiffs dropped out.
However, plaintiffs added four additional plaintiffs with the filing of an
Amended Complaint on November 27, 1995. 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. The
Court denied the Motion on April 16, 1996. All discovery in the case was
completed as of September 13, 1996. The Defendants moved for summary judgment on
September 20, 1996. The plaintiffs filed an opposition on November 18, 1996.
Defendants filed a Reply brief on February 27, 1997. 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. In May, an agreement in principal was reached
to settle the case subject to a number of corrections not yet satisfied.
Definitive settlement documents are being prepared.
11. Related Party Transactions
For the years ended December 31, 1995 and 1994, Continuum Care of
Massachusetts, Inc., whose principal shareholder is Mr. Gosman, provided
management services to the Company. Fees for these services in the amount of
$3,729,680 and $1,629,753, respectively, have been included in the financial
statements and consist of the following:
December 31,
-------------------------
1995 1994
---------- ----------
Salaries, wages and benefits.................... $2,267,891 $ 934,200
Professional fees............................... 273,941 253,955
Rent............................................ 459,732 192,242
Other........................................... 728,116 249,316
--------- ---------
$3,729,680 $1,629,713
========= =========
Such fees were based on the discretion of Continuum Care of Massachusetts,
Inc., and may not have been 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 was rent expense of
approximately $415,000 and $156,000 for the years ended December 31, 1995 and
1994, respectively, for the Company's principal office space in West Palm Beach,
Florida. The lessee of the office space prior to the offering was Continuum Care
of Massachusetts, Inc. The current lease term expires January 31, 2000.
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 was required to make contingent note payments in the amount of
$4,444,444 which had been accrued at December 31, 1995. Payments
F-28
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
on the contingent note are based on attaining certain earnings thresholds. A
charge of $1,271,000 related to this contingent note was recorded during 1995.
The $4,444,444 which had been accrued represented the maximum remaining amount
because the earnings threshold upon which the payment is based was reached
during 1995. The contingent note was 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 and were repaid during 1996.
Meditrust, a publicly traded real estate investment trust with assets in
excess of $2.4 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 $176,000,000 for 19 facilities developed by
DASCO.
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 obtained equity interests in the entities which own
26 of the 29 facilities developed by DASCO. The collective interests of Messrs.
Sands and Rendina range from 17% to 100%. In addition, Mr. Gosman individually
and as trustee for his two sons and Frederick R. Leathers, Robert A. Miller,
William A. Sanger, and Edward E. Goldman have obtained limited partnership
interests ranging from 14% to 36% in the entities which own 11 facilities being
developed by the Company through DASCO. During the year ended January 31, 1997,
DASCO recorded revenues in the amount of $9,986,790 related to facilities
developed by DASCO in which equity interests have been obtained by related
parties.
The Company provides construction management, development marketing and
consulting services to entities principally owned by Mr. Gosman in connection
with the development and operation by such entities of several medical
facilities. During the year ended January 31, 1997, the Company recorded
revenues in the amount of $7,047,611 related to such services. The Company
provides these services to affiliated parties on terms no less favorable to the
Company than those provided to unaffiliated parties.
The Company was required to assume an unfavorable lease in one of its
acquisitions. The Company planned to dispose of the lease and accrued $559,000
in purchase accounting which represents the difference between the unfavorable
lease costs and the estimated fair market value rent. The Company assigned the
lease in January 1997 to an entity principally owned by Mr. Gosman.
Included in operating expenses are discretionary management fees paid or
accrued to the principal shareholders of CSL for management-related services.
Approximately $987,000, $1,700,000 and $802,000 of such management fees were
incurred for the years ended January 31, 1997, December 31, 1995 and December
31, 1994, respectively, and are included in operating expenses.
A key officer of CSL entered into an employment agreement with CSL, dated
January 1995, which entitled him to additional compensation of 5.5% of annual
net profits and, in the event of an IPO or sale of CSL, 5% of the proceeds from
any such transaction. In June 1996, the principal shareholders in CSL decided to
formalize their arrangement with this officer as to his equity participation in
the business. To effect this decision, the employee was granted a 15% equity
interest in CML, which was merged into CSL effective January 1, 1997. Based on
an independent appraisal, the Company valued the transaction at $627,640 and
recorded the amount as a 1996 operating expense. On January 1, 1997, the officer
entered into a new employment agreement with CSL, with no
F-29
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
provisions as to the sharing of profits, or proceeds, in the event of an IPO or
sale of CSL.
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 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. Cash
collateralizing the letter of credit, which has a balance of $4,504,184 at
January 31, 1997, is included in other long-term assets on the balance sheet.
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 was 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 and the remainder were
repaid during 1996.
12. 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 quoted market prices for the same or similar issues or 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 January 31, 1997
and December 31, 1995 is $118,830,259 and $97,090,266, respectively.
13. Employee Benefit Plan
The Company sponsors 401(k) plans, covering substantially all of its
employees. Contributions under the primary 401(k) plan equal 50% of the
participants' contributions up to a maximum of $400 per participant per year.
For the employees of CSL, the Company allows eligible employees to
contribute up to 15% of their compensation and the Company may match up to 20%
of the employees first 5% of covered compensation.
14. Income Taxes
The financial statements of the Company for the periods prior to the
offering do not include a provision for income taxes because the taxable income
of the various entities that comprise the Company were either included in
F-30
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
the tax return of the Partnership's partners and former Subchapter S
corporation's shareholders, or the entities generated significant losses.
The Company became subject to federal and state income taxes effective the
date of the Company's initial public offering. Significant components of the
Company's provision for income taxes for the year ended January 31, 1997:
1997
--------
Federal:
Current.............................................. $ 4,305,329
Deferred............................................. 1,084,693
------------
Total federal.............................. 5,390,022
------------
State:
Current.............................................. 1,176,555
Deferred............................................. 269,489
------------
Total state................................ 1,446,044
------------
Totals............................................... $ 6,836,066
============
Significant components of the Company's deferred tax assets and liabilities
as of January 31,1997 are as follows:
1997
--------
Deferred tax asset
Allowance for doubtful accounts,
reserves and other accrued expenses............. $ 1,493,180
Net operating loss........................................ 13,226,228
----------
Total deferred tax assets............... 14,719,408
----------
Deferred tax liability
Property and depreciation................................. (856,173)
Amortization.............................................. (647,902)
Other..................................................... (318,165)
----------
Total deferred tax liability............ (1,822,240)
----------
Deferred tax asset (liability)............................ 12,897,168
----------
Valuation allowance....................................... (14,251,349)
==========
Net deferred tax asset (liability)........................ $ (1,354,181)
==========
The Company reasonably believes that, because of limitations imposed by the
Internal Revenue Code, net operating losses of $33,065,570 and other deferred
tax assets, which arise out of OTI, will not be recognized in future years.
Accordingly, the Company has established a full valuation allowance for these
deferred tax assets.
The net operating losses of $33,065,570 will begin to expire in 2005.
F-31
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
The reconciliation of income tax computed at statutory rates to income tax
expense is as follows:
1997
----
Statutory rate................................................. 35%
Permanent differences.......................................... 1%
State income tax (net of federal
benefit)............................................. 5%
Valuation allowance............................................ (7%)
Other.......................................................... 2%
---
36%
===
15. Supplemental Cash Flow Information
During the year ended January 31, 1997 and the year ended December 31,
1995, the Company acquired the assets and assumed certain liabilities of various
entities. The transactions had the following non-cash impact on the balance
sheets:
January 31, December 31,
1997 1995
-------------- -------------
Current assets $ 4,692,389 $ 12,463,007
Property, plant and equipment 4,693,603 40,817,404
Intangibles 56,964,439 43,155,934
Other noncurrent assets 25,541 2,197,691
Current liabilities (9,667,604) (8,174,988)
Debt (7,360,320) (43,179,672)
Noncurrent liabilities (11,603,513) (2,913,635)
Equity (10,010,325) -
============== =============
Net cash used for acquisitions $ 27,734,210 $ 44,365,741
============== =============
During the year ended January 31, 1997, the Company purchased $643,500 of
equipment under capital leases. In addition, cash paid for interest during the
year ended January 31,1997 and the year ended December 31, 1995 was $5,571,800
and $2,772,082, respectively. Income taxes paid for the year ended January 31,
1997 were $3,320,241. There was no interest paid for the year ended December 31,
1994 and there were no income taxes paid for the years ended December 31, 1995
and 1994.
F-32
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
16. Stock Option Plan
The Company has adopted a stock option plan and authorized the issuance of
4,100,000 shares of the Company's 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 options generally will become exercisable beginning in the
first year after grant in 20% -- 33% increments per year and expire ten years
after the date of grant. Information related to the stock option plan is
summarized as follows:
Year Ended Year Ended
January 31,1997 December 31, 1995
------------------------ ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ----------- --------- ---------
Outstanding, beginning of 1,200,500 $ 14.49 127,500 $ 4.00
period
Options granted:
At fair market value 1,122,500 20.35 445,000 13.65
Above fair market value 108,914 3.13 -- --
(CSL options - see
below)
Options exercised (52,166) 6.97 -- --
Options canceled (23,334) 18.14 -- --
========== ======== ========== =======
Outstanding, end of period 2,356,414 16.85 572,500 $ 10.93
========== ======== ========== =======
Weighted average fair
value of options $9.27 $6.67
granted during the year ======== =======
At January 31, 1997 and December 31, 1995 options for 614,977 and 47,500,
respectively were exercisable.
Significant option groups outstanding at January 31, 1997 and related
weighted average price and life are as follows:
Options Outstanding Options Exercisable
- ------------------------------------------------------ -----------------------
Shares Shares
Outstanding Weighted Exercisable Weighted
at Remaining Average at Average
Range of January 31, Contractual Exercise January 31, Exercise
Exercise Price 1997 Life Price 1997 Price
- ---------------- ------------ ----------- --------- ------------ ---------
$3.00 - $5.00 230,914 8.3 $ 3.63 81,893 $ 3.78
$14.38 - $18.75 1,315,500 9.0 16.87 348,084 16.85
$19.00 - $24.75 810,000 9.5 20.72 185,000 20.45
The fair value of each option grant is estimated on the date of grant using
the Black-Sholes option-pricing model with the following weighted average
assumptions for grants in the year ended January 31, 1997, the one month ended
January 31, 1996, and the year ended December 31, 1995: expected volatility
(post-offering) of 56%, risk free interest rates of 6.4%, expected life of 4.5
years, and expected dividends of $0.
Options which were assumed in connection with CSL employees during 1996
were valued using the minimum value method, which is appropriate for nonpublic
companies, assuming a ten year option life, 5.5% risk free
F-33
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
interest rate, and no volatility. These options were granted with an exercise
price significantly greater than the market value of the company and accordingly
had a fair market value and associated expense of zero. Former CSL options have
been converted to 108,914 of the Company's options with an exercise price of
$3.13 and are included above.
The Company continues to account for stock based compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", as allowed by SFAS No. 123. Accordingly, no compensation cost has
been recognized for options granted. Had compensation for those plans been
determined based on the fair value at the grant date for awards during the year
ended January 31, 1997, the month ended January 31, 1996 and the year ended
December 31, 1995 consistent with SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the following pro forma amounts:
Year Ended Year Ended
January 31, December 31,
1997 1995
-------- ---------
Net income (loss)
As reported................................. $ 15,290 $ (8,094)
Pro forma................................... 12,880 (8,142)
Earnings (loss) per common share
As reported................................. $ 0.55 --
Pro forma................................... 0.46 --
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
17. Net Income Per Share
Net income per common share is based upon the weighted average number of
common shares outstanding (including stock required to be issued in the future
pursuant to acquisition agreements) during the period. For the years ended
January 31, 1997, the weighted average number of common shares outstanding were
27,703,073. When dilutive, stock options (less the number of treasure shares
assumed to be purchased from the proceeds) are included in the calculation of
the weighted average number of common shares outstanding. For the year ended
January 31, 1997, conversion of the 6 3/4% Convertible Subordinated Debentures
issued in June 1996, is not assumed because the effect is anti-dilutive.
18. Ratio of Earnings to Fixed Charges
For the years ended January 31, 1997, December 31, 1995 and December 31,
1994, the ratio of earnings to fixed charges was less than 1.0X, less than 1.0X
and 3.46, respectively. 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 the rental expense. For the years ended December 31, 1995
and 1994 for purposes of computing the ratio of earnings to fixed charges, the
Company had earnings deficiencies of $1.0 million and $1.1 million,
respectively.
F-34
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
19. Segment Information (Unaudited)
The Company derives revenues from health care services and medical facility
development services. The Company commenced operations of the medical facility
development segment with the purchase of DASCO upon the completion of the
offering in January 1996. The activities related to the health care services and
medical facility development services segment are as follows (dollars in
thousands):
Medical
Facility
Health Care Development
Year ended January 31, 1997 Services Services Total
------------------------------- ---------- ----------- ---------
Net revenues............................ $ 188,952 $ 19,049 $ 208,001
Operating income........................ 12,719 11,133 23,852
Identifiable assets..................... 294,309 19,001 313,310
Depreciation & amortization............. 7,094 288 7,382
Capital expenditures.................... 3,246 2,440 5,686
20. Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly results of operations
for the periods shown:
(Dollars in thousands, except per share data)
Year Ended January 31, 1997
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Net revenues................. $ 40,459 $ 44,204 $ 55,438 $67,901
Income before income taxes... 4,164 5,211 5,713 7,039
Net income................... 2,760 3,583 3,827 5,121
Net income per share......... $0.10 $0.13 $0.14 $0.18
Year Ended December 31, 1995
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- -------
Net revenues................. $ 8,897 $ 16,184 $ 23,822 $35,182
Loss before income taxes..... (2,373)(A) (1,399) (1,031)(B) (3,291)(C)
Net loss(D).................. (2,373)(A) (1,399) (1,031)(B) (3,291)(C)
- ---------------
(A) Includes $1,111 nonrecurring earn-out payment.
(B) Includes $160 nonrecurring earn-out payment.
(C) Includes $2,500 provision for closure costs.
(D) Provisions for income taxes have not been reflected in the year ended
December 31, 1995 because there is no taxable income on a combined basis.
21. Subsequent Events
During August 1997, the Company purchased certain assets of, and entered
into a 20-year administrative services agreement with BAB Nuclear Radiology,
P.C., to operate five diagnostic imaging centers on Long Island, New York. The
purchase price was approximately $10,000,000 in cash, plus $15,000,000 in
convertible notes.
F-35
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
During September 1997, the Company entered into a secured credit agreement
with a bank providing for a $100 million revolving line of credit for working
capital and acquisition purposes. The credit agreement (i) prohibits the payment
of dividends by the Company, (ii) limits the Company's ability to incur
indebtedness and make acquisitions except as permitted under the credit
agreement, and (iii) requires the Company to comply with certain financial
covenants.
F-36
<PAGE>
Item 7. Financial Statements and Exhibits.
(a) Financial statements of business acquired.
The combined financial statements of CSL as of and for the years ended
December 31, 1996, December 31, 1995 and December 31, 1994 and the Independent
Auditors' Reports in connection therewith were filed by the Company on Form 8-K
on October 6, 1997.
(b) Pro forma financial information.
The Company's Unaudited Pro Forma Combined Balance Sheet as of July 31,
1997, Unaudited Pro Forma Combined Statements of Operations for the Six Months
ended July 31, 1997, the year ended January 31, 1997 and the years ended
December 31, 1995 and December 31, 1994, respectively, were filed by the Company
on Form 8-K on October 6, 1997.
(c) Exhibits.
Exhibit No. Exhibit Item
2.1+ Amended and Restated Agreement and Plan of
Merger dated as of July 15, 1997 by and
among the Company, Clinical Studies,
PhyMatrix Acquisition I, Inc., a Delaware
corporation, Dr. Michael Rothman, Dr. Walter
Brown, Michael T. Heffernan and Ronald
Phillips as Trustee of The Alexander Rothman
1993 Qualified Sub-Chapter S Trust and as
Trustee of The Julie Rothman 1993 Qualified
Sub-Chapter S Trust (incorporated herein by
reference to the Company's Form 8-K dated
October 6, 1997).
23.1* Consent of Coopers & Lybrand L.L.P.
27.1* Financial Data Schedule
- ---------------------
* Filed herewith
+ Previously filed
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHYMATRIX CORP.
By: /s/ Frederick R. Leathers
-----------------------------
Frederick R. Leathers,
Chief Financial Officer
Date: October 24, 1997
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Item
2.1+ Amended and Restated Agreement and Plan of Merger
dated as of July 15, 1997 by and among the Company,
Clinical Studies, PhyMatrix Acquisition I, Inc., a
Delaware corporation, Dr. Michael Rothman, Dr. Walter
Brown, Michael T. Heffernan and Ronald Phillips as
Trustee of The Alexander Rothman 1993 Qualified
Sub-Chapter S Trust and as Trustee of The Julie
Rothman 1993 Qualified Sub-Chapter S Trust
(incorporated herein by reference to the Company's
Form 8-K dated October 6, 1997).
23.1* Consent of Coopers & Lybrand L.L.P.
27.1* Financial Data Schedule
- ---------------------
* Filed herewith
+ Previously filed
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Registration Statements No.
333-03853 on Form S-8, No. 333-31973 on Form S-3 and No. 333-08269 on Form S-3
of PhyMatrix Corp. of our report dated October 20, 1997 on our audits of the
consolidated financial statements of PhyMatrix Corp. as of January 31, 1997 and
for the year ended January 31, 1997 and the combined financial statements of
PhyMatrix Corp. as of December 31, 1995 and for the year ended December 31, 1995
and December 31, 1994 appearing in this Current Report on Form 8-K.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
October 24, 1997
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<INCOME-PRETAX> 13,371,599 8,747,181 22,126,056 (8,093,740) (1,395,439)
<INCOME-TAX> 4,545,904 3,031,881 6,836,066 0 0
<INCOME-CONTINUING> 8,825,695 5,715,300 15,289,990 (8,093,740) (1,395,439)
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 8,825,695 5,715,300 15,289,990 (8,093,740) (1,395,439)
<EPS-PRIMARY> 0.30 0.21 0.55 0.00 0.00
<EPS-DILUTED> 0.30 0.21 0.55 0.00 0.00
</TABLE>
