As filed with the Securities and Exchange Commission on June 30, 1997
Registration No. 333-09187
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
Post-Effective Amendment No. 3
To
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
PHYMATRIX CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 8099 65-0617076
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
777 South Flagler Drive
West Palm Beach, FL 33401
(561) 655-3500
(Address, including zip code, and telephone number, including
area code of Registrant's principal executive offices)
---------------
Abraham D. Gosman
PhyMatrix Corp.
777 South Flagler Drive
West Palm Beach, FL 33401
(561) 655-3500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
Copies of communications to:
Michael J. Bohnen, Esquire
Nutter, McClennen & Fish, LLP
One International Place
Boston, MA 02110
(617) 439-2000
---------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
---------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------
Proposed maximum Proposed maximum Amount of
Title of each class of Amount to be offering price aggregate offering registration
securities to be registered registered per share(1) price(1) fee
- ---------------------------- ------------------ ---------------- ------------------ -------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 5,000,000 shares $23.63 $118,150,000 $40,742(2)
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Determined pursuant to Rule 457(c) under the Securities Act of 1933, as
amended, based upon the average of the high and low prices per share of
Common Stock reported on The Nasdaq National Market on July 26, 1996.
(2) Previously paid.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PROSPECTUS
5,000,000 Shares
PhyMatrix Corp.
a Physician Practice Management Company
Common Stock
---------------
This Prospectus relates to 5,000,000 shares of common stock, $.01 par value
per share (the "Common Stock"), of PhyMatrix Corp. (the "Company") that may be
offered and issued by the Company from time to time in connection with
acquisitions of other businesses or properties by the Company.
PhyMatrix intends to concentrate its acquisitions in areas related to the
current business of PhyMatrix. If the opportunity arises, however, PhyMatrix
may attempt to make acquisitions that are either complementary to its present
operations or which it considers advantageous even though they may be
dissimilar to its present activities. The consideration for any such
acquisition may consist of shares of Common Stock, cash, notes or other
evidences of debt, assumptions of liabilities or a combination thereof, as
determined from time to time by negotiations between PhyMatrix and the owners
or controlling persons of businesses or properties to be acquired.
The shares covered by this Prospectus may be issued in exchange for shares of
capital stock, partnership interests or other assets representing an interest,
direct or indirect, in other companies or other entities, in exchange for
assets used in or related to the business of such companies or entities, or
otherwise pursuant to the agreements providing for such acquisitions. The terms
of such acquisitions and of the issuance of shares of Common Stock under
acquisition agreements generally will be determined by direct negotiations with
the owners or controlling persons of the businesses or properties to be
acquired or, in the case of entities that are more widely held, through
exchange offers to stockholders or documents soliciting the approval of
statutory mergers, consolidations or sales of assets. It is anticipated that
the shares of Common Stock issued in any such acquisition will be valued at a
price reasonably related to the market value of the Common Stock either at the
time of agreement on the terms of an acquisition or at or about the time of
delivery of the shares.
It is not expected that underwriting discounts or commissions will be paid by
the Company in connection with issuances of shares of Common Stock under this
Prospectus. However, finders' fees or brokers' commissions may be paid from
time to time in connection with specific acquisitions, and such fees may be
paid through the issuance of shares of Common Stock covered by this Prospectus.
Any person receiving such a fee may be deemed to be an underwriter within the
meaning of the Securities Act of 1933, as amended (the "Securities Act").
Persons who acquire shares of Common Stock in this offering may immediately
resell such shares in the public market subject, in the case of affiliates of
the business or property that is acquired by PhyMatrix, to compliance with the
restrictions contained in Rule 145 under the Securities Act.
PhyMatrix's Common Stock is listed on The Nasdaq National Market under the
symbol "PHMX." The closing market price of PhyMatrix Common Stock on The Nasdaq
National Market on June 23, 1997 was $15.25.
---------------
Prospective investors should carefully consider the factors set forth
under the section "Risk Factors" beginning on page 6.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The Date of this Prospectus is June 23, 1997
<PAGE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information and representations must
not be relied upon as having been authorized by the Company. This Prospectus
does not constitute an offer to sell or a solicitation of any offer to buy the
securities described herein by anyone in any jurisdiction in which such offer
or solicitation is not authorized, or in which the person making the offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make such offer or solicitation. Under no circumstances shall the delivery
of this Prospectus or any sale made pursuant to this Prospectus create any
implication that the information contained in this Prospectus is correct as of
any time subsequent to the date of this Prospectus.
----------------
TABLE OF CONTENTS
Page
-----
The Company ............................................................ 3
Summary Historical Financial Data .................................... 4
Risk Factors ......................................................... 6
Price Range of Common Stock .......................................... 10
Dividend Policy ...................................................... 10
Selected Historical Financial Data .................................... 11
Management's Discussion and Analysis of Financial Condition
and Results of Operations .............................................. 12
Business ............................................................... 22
Management ............................................................ 34
Certain Transactions ................................................... 40
Principal Stockholders ................................................ 42
Description of Capital Stock .......................................... 43
Plan of Distribution ................................................... 46
Validity of Common Stock ............................................. 46
Experts ............................................................... 46
Additional Information ................................................ 46
Index to Financial Statements .......................................... F-1
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
See "Risk Factors" for information that should be considered by prospective
investors.
The Company
The Company is a multi-specialty 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 through the management of
independent physician associations ("IPAs") and specialty care physician
networks by 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 and
ambulatory surgery. Since its first acquisition in September 1994, the Company
has acquired the practices of and entered into long term agreements to
affiliate with 300 physicians; has obtained interests in MSOs in Connecticut,
Georgia, New Jersey, New York and Florida that provide management services to
IPAs composed of over 3,700 multi-specialty physicians; purchased a company
that provides contract management services to approximately 2,400 physicians in
specialty care networks; and acquired several medical support service companies
and a medical facility development company.
The Company believes that its strategy of developing management networks in
specific geographic locations creates synergies, achieves operating efficiencies
and responds to the cost-containment initiatives of payors, particularly managed
care companies. To date, the Company has acquired the practices of and
affiliated with 73 oncologists and provides comprehensive cancer-related support
services including radiation therapy, infusion therapy and diagnostic imaging.
The Company has contracts with managed care organizations under which the
Company and its affiliated physicians provide cancer-related health care
services to over 230,000 covered lives. In addition, through management of
contracts with 2,400 physicians the Company facilitates the delivery of
specialty health care services to approximately 7,300,000 member patients. The
Company plans to continue to increase its managed care capabilities into
additional specialty care physician networks and to expand existing
relationships with established managed care organizations. The Company also
intends to develop additional disease management networks for the treatment of
other chronic illnesses such as diabetes, cardiovascular diseases and infectious
diseases.
In certain targeted markets, the Company organizes its affiliated
physicians and related medical support services into integrated clusters of
disease specialty and primary care networks, which it terms local provider
networks ("LPNs"). LPNs are designed to provide a comprehensive range of
physician and medical support services within specific geographic regions. The
Company believes that its LPN structure achieves operating efficiencies and
enhances its ability to secure contracts with managed care organizations. To
date, the Company is developing LPNs in each of the Florida, Atlanta,
Washington, D.C./Baltimore areas and the tri-state area of Connecticut, New
York and New Jersey.
As part of its strategy to integrate physician practices, the Company
provides medical facility development services to related and unrelated third
parties for the development of health parks, medical malls and medical office
buildings. Such services include project finance assistance, project
management, construction management, construction design engineering, physician
recruitment, leasing and marketing. While the Company incurs certain
administrative and other expenses in the course of providing such services, it
does not incur costs of construction or risks of project ownership. The
Company's strategy in financing its projects is to involve future tenants as
significant investors in and owners of the developed medical facilities.
Because most of its tenants are physicians and medical support service
companies, the Company believes that the relationships that it develops with
these parties through its medical facility development efforts also enhances
the Company's ability to affiliate with physicians and acquire physician
practices and medical support service companies. Further, the Company believes
that the development of health parks, medical malls and medical office
buildings in certain markets will aid in the integration of its affiliated
physicians and medical support services.
3
<PAGE>
The Company's principal place of business is 777 South Flagler Drive, West
Palm Beach, Florida 33401; and its telephone number at that address is (561)
655-3500. Unless otherwise indicated or required by the context, references to
the "Company" include its consolidated subsidiaries.
Prospective investors are cautioned that the statements in this Prospectus
that are not descriptions of historical facts may be forward-looking
statements, including, but not limited to, statements contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Such statements reflect management's current views, are based on
many assumptions and are subject to risks and uncertainties. Actual results
could differ materially from those currently anticipated due to a number of
factors, including, but not limited to, those discussed in "Risk Factors."
SUMMARY HISTORICAL FINANCIAL DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Combined Three Three
June 24, 1994 Combined Consolidated Consolidated Months Months
(Inception) to Year Ended Month Ended Year Ended Ended Ended
December 31, December 31, January 31, January 31, April 30, April 30,
1994(1) 1995 1996(2) 1997 1996 1997
---------------- -------------- -------------- -------------- -------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenue ........................ $ 2,447 $ 70,733 $ 10,715 $ 189,961 $ 37,207 $ 70,158
-------- --------- ---------- ---------- ---------- ----------
Operating expenses:
Cost of affiliated physician
management services ............ -- 9,656 2,797 42,245 8,533 16,977
Salaries, wages and benefits ...... 2,142 31,976 3,637 52,313 11,660 16,352
Depreciation and amortization ... 107 3,863 535 7,144 1,593 2,172
Rent expense ..................... 249 4,503 565 7,653 1,706 3,073
Earn out payment .................. -- 1,271 -- -- -- --
Provision for closure loss ...... -- 2,500 -- -- -- --
Other ........................... 1,150 23,706 3,515 60,764 9,892 24,975
-------- --------- ---------- ---------- ---------- ----------
Income (loss) from operations ...... (1,201) (6,742) (334) 19,842 3,823 6,609
Interest expense, net ............ 95 4,852 812 1,658 269 656
(Income) loss from investments
in affiliates .................. -- (569) 30 (709) (142) (218)
-------- --------- ---------- ---------- ---------- ----------
Net income (loss) before taxes ... (1,296) (11,025) (1,176) 18,893 3,696 6,171
Income tax expense ............... -- -- -- 6,836 1,404 2,245
======== ========= ---------- ---------- ---------- ----------
Net income (loss) (3) ............ $ (1,296) $ (11,025) $ (1,176) $ 12,057 $ 2,292 $ 3,926
======== ========= ========== ========== ========== ==========
Net income (loss) per share ...... $ (0.08) $ 0.54 $ 0.11 $ 0.17
========== ========== ========== ==========
Weighted average shares
outstanding ..................... 14,204,305 22,511,448 21,529,950 23,708,982
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, January 31, January 31, April 30, April 30,
1994 1995 1996 1997 1996 1997
-------------- -------------- ------------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital ............... $2,590 $ (22,286) $44,209 $ 107,465 $ 39,872 $106,698
Accounts receivable, net ...... 3,778 20,711 21,562 35,846 24,447 42,011
Total assets .................. 15,408 132,187 180,007 298,124 174,420 307,684
Total debt ..................... 1,369 96,941 36,470 111,422 30,312 110,505
Shareholders' equity ......... 11,667 12,678 127,209 148,891 129,511 154,566
</TABLE>
4
<PAGE>
- ----------
(1) The Company was incorporated in October 1995 to combine the business
operations of certain companies (the "Related Companies") controlled by
Abraham D. Gosman, the Company's Chairman and Chief Executive Officer. The
business operations of the Related Companies were acquired from third
parties in transactions completed since September 1994. Simultaneously
with the closing of the Company's initial public offering on January 23,
1996 (the "Initial Public Offering"), the Related Companies were
transferred to the Company in exchange for 13,307,450 shares of the
Company's Common Stock (the "Formation").
(2) In January 1996, the Company changed its fiscal year end from December 31
to January 31.
(3) Provisions for income taxes have not been reflected in the combined
financial statements because there is no taxable income on a combined
basis.
5
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective purchasers should carefully consider the factors set forth below
before purchasing the shares of Common Stock offered hereby.
Limited Operating History
The Company has a limited operating history and acquired its first
operating company in September 1994. Almost all of the businesses acquired by
the Company to date were operated by managements unaffiliated with the
Company's management or with each other.
Risks Related to Growth Strategy
The Company's strategy involves growth primarily through affiliation with
physicians and acquisition of medical practices and other businesses. The
Company is subject to various risks associated with its acquisition growth
strategy, including the risk that the Company will be unable to identify,
recruit or acquire suitable acquisition candidates or to integrate and manage
the acquired practices or companies. The growth of the Company is largely
dependent on the Company's ability to form networks of affiliated physicians
from its acquired practices, to manage and control costs, and to realize
economies of scale. Any failure of the Company to implement economically
feasible acquisitions and affiliations may have a material adverse effect on
the Company. There can be no assurance that the Company will be able to achieve
and manage planned growth, that the assets of physician practice groups or
other health care providers will continue to be available for acquisition by
the Company, that the liabilities assumed by the Company in any acquisition
will not have a material adverse effect on the Company, or that the addition of
physician practice groups or other health care providers will be profitable for
the Company.
Risks Related to Capital Requirements
The Company's acquisition and expansion programs will require substantial
capital resources. In addition, the operation of physician groups, integrated
networks and related medical support service companies requires ongoing capital
expenditures. There can be no assurance that the Company will be able to raise
additional capital when needed on satisfactory terms or at all. Any limitation
on the Company's ability to obtain additional financing could have a material
adverse effect on the Company.
Government Regulation
Providers of health care services, including physicians and other
clinicians, are subject to extensive federal and state regulation. The fraud
and abuse provisions of the Social Security Act prohibit the solicitation,
payment, receipt or offering of any direct or indirect remuneration in return
for, or the inducement of, the referral of patients, items or services that are
paid for, in whole or in part, by Medicare or Medicaid. These laws also impose
significant penalties for false or improper billings for physician services and
impose restrictions on physicians' referrals for designated health services to
entities with which they have financial relationships. Violations of these laws
may result in substantial civil or criminal penalties for individuals or
entities, including large civil monetary penalties and exclusion from
participation in the Medicare and Medicaid programs. Similar state laws also
apply to the Company. Such exclusion and penalties, if applied to the Company's
affiliated physician groups or medical support service providers, could have a
material adverse effect on the Company. See "Business--Government Regulation."
The laws of many states prohibit business corporations such as the Company
from exercising control over the medical judgments or decisions of physicians
and from engaging in certain financial arrangements, such as splitting fees
with physicians. These laws and their interpretations vary from state to state
and are enforced by both the courts and regulatory authorities, each with broad
discretion. Expansion of the operations of the Company to certain jurisdictions
may require structural and organizational modifications of the Company's form
of relationship with physician groups, which could have an adverse effect on
the Company. There can be no assurance that the Company's physician management
agreements will not be challenged as constituting the unlicensed practice of
medicine or that the enforceability of the provisions of such agreements,
including non-competition agreements, will not be limited.
Under certain provisions of the Omnibus Budget Reconciliation Act of 1993
known as "Stark II," physicians who refer Medicare and Medicaid patients to the
Company for certain designated services may not own stock in the Company, and
the Company may not accept such referrals from physicians who own stock in the
Company. Stark II contains an exemption which applies to the Company during any
year if at the end of the previous fiscal
6
<PAGE>
year the Company had stockholders' equity in the amount of at least $75
million. The Company was not eligible for this exemption as of its fiscal year
ending December 31, 1995. In 1996, the Company changed its fiscal year end to
January 31, at which time it satisfied the Stark II stockholders' equity
exception. Violation of Stark II by the Company could have a material adverse
effect on the Company.
The Company believes that its operations are conducted in material
compliance with applicable laws, however, the Company has not received a legal
opinion to this effect and many aspects of the Company's business operations
have not been the subject of state or federal regulatory interpretation.
Moreover, as a result of the Company providing both physician practice
management services and medical support services, the Company may be the
subject of more stringent review by regulatory authorities, and there can be no
assurance that a review of the Company's operations by such authorities will
not result in a determination that could have a material adverse effect on the
Company or its affiliated physicians. Additionally, there can be no assurance
that the health care regulatory environment will not change so as to restrict
the Company's or the affiliated physicians' existing operations or their
expansion. The regulatory framework of certain jurisdictions may limit the
Company's expansion into, or ability to continue operations within, such
jurisdictions if the Company is unable to modify its operational structure to
conform to such regulatory framework or to obtain necessary approvals, licenses
and permits. Any limitation on the Company's ability to expand could have a
material adverse effect on the Company. See "Business--Government Regulation."
Dependence on Third Party Reimbursement; Trends and Cost Containment
Substantially all of the Company's patient service revenues are derived
from third party payors. The Company's revenues and profitability may be
materially adversely affected by the current trend within the health care
industry toward cost containment as government and private third party payors
seek to impose lower reimbursement and utilization rates and negotiate reduced
payment schedules with service providers. The Company believes that this trend
will continue to result in a reduction from historical levels of per-patient
revenue. Continuing budgetary constraints at both the federal and state level
and the rapidly escalating costs of health care and reimbursement programs have
led, and may continue to lead, to significant reductions in government and
other third party reimbursements for certain medical charges and to the
negotiation of reduced contract rates or capital or other financial
risk-shifting payment systems by third party payors with service providers.
Both the federal government and various states are considering imposing
limitations on the amount of funding available for various health care
services. The Company cannot predict whether or when any such proposals will be
adopted or, if adopted and implemented, what effect, if any, such proposals
would have on the Company. Further reductions in payments to physicians or
other changes in reimbursement for health care services could have a material
adverse effect on the Company, unless the Company is otherwise able to offset
such payment reductions.
Rates paid by private third party payors, including those that provide
Medicare supplemental insurance, are based on established physician, clinic and
hospital charges and are generally higher than Medicare payment rates. Changes
in the mix of the Company's patients among the non-government payors and
government sponsored health care programs, and among different types of
non-government payor sources, could have a material adverse effect on the
Company.
The Company is a provider of certain medical treatment and diagnostic
services including, but not limited to radiation therapy, infusion therapy,
lithotripsy and home care. Because many of these services receive governmental
reimbursement, they may be subject from time to time to changes in both the
degree of regulation and level of reimbursement. Additionally, factors such as
price competition and managed care also could reduce the Company's revenues.
See "Business--Reimbursement and Cost Containment."
There can be no assurance that payments under governmental and private
third party payor programs will not be reduced or will, in the future, be
sufficient to cover costs allocable to patients eligible for reimbursement
pursuant to such programs, or that any reductions in the Company's revenues
resulting from reduced payments will be offset by the Company through cost
reductions, increased volume, introduction of new procedures or otherwise. See
"Business--Reimbursement and Cost Containment."
7
<PAGE>
Risks Associated with Managed Care Contracts
As an increasing percentage of patients come under the control of managed
care entities, the Company believes that its success will be, in part,
dependent upon the Company's ability to negotiate contracts with health
maintenance organizations ("HMOs"), employer groups and other private third
party payors pursuant to which services will be provided on a risk-sharing or
capitated basis. Under some of these agreements, a health care provider accepts
a predetermined amount per member per month in exchange for providing all
covered services to patients. Such contracts pass much of the economic risk of
providing care from the payor to the provider. The Company's success in
implementing its strategy of entering into such contracts in markets served by
the Company could result in greater predictability of revenues, but increased
risk to the Company resulting from uncertainty regarding expenses. To the
extent that patients or enrollees covered by such contracts require more
frequent or extensive care than is anticipated, additional costs would be
incurred, resulting in a reduction in operating margins. In the worst case,
revenues associated with risk-sharing contracts or capitated provider networks
would be insufficient to cover the costs of the services provided. Any such
reduction or elimination of earnings could have a material adverse effect on
the Company. Moreover, there is no certainty that the Company will be able to
establish and maintain satisfactory relationships with third party payors, many
of which already have existing provider structures in place and may not be able
or willing to re-arrange their provider networks. Increasingly, some
jurisdictions are taking the position that capitated agreements in which the
provider bears the risk should be regulated by insurance laws. As a
consequence, the Company may be limited in some of the states in which it
operates in its attempt to enter into or arrange capitated agreements for its
affiliated physician practices, employee physicians or medical support service
providers when those capitated arrangements involve the assumption of risk.
Dependence on Physicians and Other Medical Service Providers
The Company is dependent upon its affiliations with physicians and other
medical support service providers. The Company has entered into management
and/or employment agreements with most of its physicians and other medical
service providers for terms ranging from seven to 40 years. A significant
number of the Company's affiliated physicians and other medical service
providers have the right to terminate their contracts before the expiration of
their respective terms. In the event that a significant number of such
physicians or providers terminate their contracts or become unable or unwilling
to continue in their roles, the Company's business could be materially
adversely affected. See "Business."
Potential Liability and Insurance
The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. The Company believes that it does not
engage in the practice of medicine, however, the Company could be implicated in
such a claim through one of its providers, and there can be no assurance that
claims, suits or complaints relating to services delivered by an affiliated
physician or medical service provider will not be asserted against the Company
in the future. Although the Company maintains insurance it believes is adequate
both as to risks and amounts, there can be no assurance that any claim asserted
against the Company for professional or other liability will be covered by, or
will not exceed the coverage limits of, such insurance.
Medical Facility Development
The Company engages in the development of health parks, medical malls and
medical office buildings and, in connection with these projects, enters into
development contracts for the provision of all or some of the following
services: project finance assistance, project management, construction
management, construction design engineering consultation, physician
recruitment, leasing and marketing. Many of these contracts hold the Company
liable for any development cost overruns and also require the Company to
indemnify the owner of the medical facility and the owner of the land on which
a medical facility is developed against certain liabilities or losses. As a
result, the Company, which is not a contractor, enters into construction
contracts with general contractors to construct its projects for a "guaranteed
maximum cost" and requires the general contractors to maintain performance
bonds and to indemnify the Company against certain liabilities and losses. Any
claim for development cost overruns not covered by a performance bond or any
request for indemnification by the owner of the medical facility or the
owner of the land on which a medical facility is developed, if the Company is
not indemnified by others, could have a material adverse effect on the Company.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Medical Facility Development" and "Business--Medical Facility
Development."
8
<PAGE>
Control by Existing Stockholders
On June 23, 1997 all of the Company's executive officers and directors as a
group beneficially owned approximately 50.0% of the outstanding shares of Common
Stock. As a result, such executive officers and directors, should they choose to
act together, will be able to determine the outcome of corporate actions
requiring stockholder approval and to control the election of the Company's
Board of Directors. This ownership may have the effect of discouraging
unsolicited offers to acquire the Company. See "Principal Stockholders."
Dependence Upon Key Personnel
The Company is dependent upon the ability and experience of its executive
officers, in particular Abraham D. Gosman and Bruce A. Rendina, and there can
be no assurance that the Company will be able to retain all of such officers.
The failure of such officers to remain active in the Company's management could
have a material adverse effect on the Company.
Rights of Holders of the Company's Debentures
On June 26, 1996, the Company completed the debt offering of $100,000,000
aggregate principal amount of its 6-3/4% Convertible Subordinated Debentures due
2003 (the "Debentures") pursuant to an exemption from the registration
requirements of the Securities Act (the "Debt Offering"). The Debentures are
convertible into Common Stock at any time after August 25, 1996 and prior to
redemption or final maturity, initially at a conversion price of $28.20 per
share. The conversion price is subject to adjustment upon the occurrence of
certain events or in certain circumstances. The Debentures were initially issued
under an indenture dated as of June 15, 1996 (the "Indenture"). The Indenture
provides the holders of the Debentures with certain rights that could affect the
market price of the Common Stock and could have the effect of discouraging a
third party from attempting to obtain control of the Company.
In the event of a change in control of the Company, each holder of the
Debentures will have the right, at the holder's option, to require the Company
to repurchase all or a portion of such holder's Debentures at a price equal to
100% of the principal amount thereof, plus accrued interest to the date of
repurchase. Failure by the Company to repurchase the Debentures when required
will result in an Event of Default (as such term is defined in the Indenture).
Upon the occurrence of an Event of Default, the principal and premium, if any,
on the outstanding Debentures may be declared, or may automatically become, due
and payable immediately.
The Company has filed a registration statement on Form S-1 with the
Securities and Exchange Commission relating to the resale of the Debentures and
the resale of the shares of Common Stock initially issuable upon conversion of
the Debentures by any holders of the Debentures that did not purchase the
Debentures under the registration statement. If the registration statement
ceases to be effective or usable for the offer and sale of the Debentures and
such shares of Common Stock for a period of time exceeding 90 days in the
aggregate in any one-year period or 30 days in any calendar quarter, the Company
is required to pay liquidated damages to each holder of the Debentures or such
shares Common Stock.
Shares Eligible for Future Sale
Sales of substantial amounts of Common Stock in the public market during or
after the offering of securities hereby, or otherwise, or the perception that
such sales could occur, may adversely affect prevailing market prices of the
Common Stock and could impair the future ability of the Company to raise capital
through an offering of its equity securities. In connection with the Initial
Public Offering, the Company issued 13,307,450 shares of Common Stock to certain
management and founder stockholders. In addition, in connection with
acquisitions completed through June 23, 1997, the Company issued or agreed to
issue an additional 843,366 shares of restricted stock assuming, with respect to
the shares which have yet to be issued, that the issue price (which is based on
the average price of the Common Stock during the five business days preceeding
the issuance) is $15.25, the closing price of the Common Stock on the NASDAQ
National Market on June 23, 1997. All of these shares are "restricted
securities" within the meaning of the Securities Act. Unless the resale of the
shares is registered under the Securities Act, these shares may not be sold in
the open market until after the first anniversary of the date they were acquired
and then only in compliance with the applicable requirements of Rule 144. The
Company also has granted rights to the holders of most of the shares of
restricted stock to have their shares registered under the Securities Act.
9
<PAGE>
In connection with the Debt Offering, the Company filed a registration
statement on Form S-1 with the Commission relating to the resale of
$100,000,000 aggregate principal amount of the Debentures, and the resale of up
to 3,546,099 shares of the Common Stock initially issuable upon conversion of
the Debentures by any holders of the Debentures that did not purchase the
Debentures under the registration statement.
Persons who acquire shares of Common Stock in this offering may
immediately resell such shares in the public market subject, in the case of
affiliates of the business or property that is acquired by PhyMatrix, to
compliance with the restrictions contained in Rule 145 under the Securities
Act.
Possible Volatility of Stock Price
There can be no assurance that any active public market for the Common
Stock will continue during or after the issuance of securities offered hereby.
From time to time during or after the issuance of securities offered hereby,
there may be significant volatility in the market price for the Common Stock.
Quarterly operating results of the Company, changes in general conditions in
the economy or the health care industry, or other developments affecting the
Company or its competitors could cause the market price of the Common Stock to
fluctuate substantially. The equity markets have, on occasion, experienced
significant price and volume fluctuations that have affected the market prices
for many companies' securities and that have often been unrelated to the
operating performance of these companies. Concern about the potential effects
of health care reform measures has contributed to the volatility of stock
prices of companies in health care and related industries and may similarly
affect the price of the Common Stock. Any such fluctuations that occur during
or after the issuance of the securities offered hereby may adversely affect the
market price of the Common Stock.
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on The Nasdaq National Market under the symbol
"PHMX." The following table sets forth for each period indicated the high and
low closing prices for the Common Stock as reported by The Nasdaq National
Market.
High Low
-------- -------
February 1, 1996 through April 30, 1996 ....... $23.63 $18.75
May 1, 1996 through July 31, 1996 ............... 25.50 18.25
August 1, 1996 through October 31, 1996 ......... 25.25 16.00
November 1, 1996 through January 31, 1997 ...... 18.88 13.00
February 1, 1997 through April 30, 1997 ......... 16.25 11.00
May 1, 1997 through June 23, 1997 ............... 16.38 11.13
On June 23, 1997, the last reported sale price of the Common Stock was
$15.25. As of June 23, 1997, there were approximately 168 holders of record of
the Company's Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends and does not anticipate paying
cash dividends in the foreseeable future. It is the present intention of the
Board of Directors to reinvest all earnings in the business of the Company to
support future growth.
10
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
(Dollars in thousands, except share data)
The selected historical financial data set forth below have been derived
from the financial statements of the Company. The combined financial statements
of the Company as of December 31, 1994 and December 31, 1995 and for the period
from June 24, 1994 (inception) to December 31, 1994 and the year ended December
31, 1995 and the consolidated financial statements of the Company as of January
31, 1996 and 1997, for the month ended January 31, 1996, the fiscal year ended
January 31, 1997 and the three months ended April 30, 1996 and 1997 (unaudited)
together with the notes thereto and the related report of Coopers & Lybrand
L.L.P., independent accountants, are included elsewhere in this Prospectus. The
selected historical financial data of the Company should be read in conjunction
with the related financial statements and notes thereto appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
Combined Three Three
June 24, 1994 Combined Consolidated Consolidated Months Months
(Inception) to Year Ended Month Ended Year Ended Ended Ended
December 31, December 31, January 31, January 31, April 30, April 30,
1994 1995 1996(1) 1997 1996 1997
---------------- -------------- -------------- -------------- ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenue ........................ $ 2,447 $ 70,733 $ 10,715 $ 189,961 $ 37,207 $ 70,158
-------- --------- ---------- ---------- ---------- ---------
Operating expenses:
Cost of affiliated physician
management services ............ -- 9,656 2,797 42,245 8,533 16,977
Salaries, wages and benefits ...... 2,142 31,976 3,637 52,313 11,660 16,352
Depreciation and amortization ... 107 3,863 535 7,144 1,593 2,172
Rent expense ..................... 249 4,503 565 7,653 1,706 3,073
Earn out payment .................. -- 1,271 -- -- -- --
Provision for closure loss ...... -- 2,500 -- -- -- --
Other ........................... 1,150 23,706 3,515 60,764 9,892 24,975
-------- --------- ---------- ---------- ---------- ---------
Income (loss) from operations ...... (1,201) (6,742) (334) 19,842 3,823 6,609
Interest expense, net ............ 95 4,852 812 1,658 269 656
(Income) loss from investments
in affiliates .................. -- (569) 30 (709) (142) (218)
-------- --------- ---------- ---------- ---------- ---------
Net income (loss) before taxes ... (1,296) (11,025) (1,176) 18,893 3,696 6,171
Income tax expense ............... -- -- -- 6,836 1,404 2,245
======== ========= ---------- ---------- ---------- ---------
Net income (loss) (2) ............ $ (1,296) $ (11,025) $ (1,176) $ 12,057 $ 2,292 $ 3,926
======== ========= ========== ========== ========== =========
Net income (loss) per share ...... $ (0.08) $ 0.54 $ 0.11 $ 0.17
========== ========== ========== =========
Weighted average shares
outstanding ..................... 14,204,305 22,511,448 21,529,950 23,708,982
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, January 31, January 31, April 30, April 30,
1994 1995 1996 1997 1996 1997
------------ ------------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital ...................... $2,590 $(22,286) $44,209 $107,465 $ 39,872 $106,698
Accounts receivable, net ............. 3,778 20,711 21,562 35,846 24,447 42,011
Total assets ......................... 15,408 132,187 180,007 298,124 174,420 307,684
Total debt ............................ 1,369 96,941 36,470 111,422 30,312 110,505
Shareholders' equity ................ 11,667 12,678 127,209 148,891 129,511 154,566
</TABLE>
- ----------
(1) In January 1996, the Company changed its fiscal year end from December 31
to January 31.
(2) Provisions for income taxes have not been reflected in the combined
financial statements because there is no taxable income on a combined
basis.
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
The Company is a multispecialty 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 through the management of
independent physician associations ("IPAs") and specialty care physician
networks by 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 and
ambulatory surgery. Since its first acquisition in September 1994, the Company
has acquired the practices of and entered into long-term agreements to
affiliate with 300 physicians; has obtained interests in MSOs in Connecticut,
Georgia, New Jersey, New York and Florida that provide management services to
IPAs composed of over 3,700 multispecialty physicians; purchased a company that
provides contract management services to approximately 2,400 physicians in
specialty care networks; 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.
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 $1,058,400
payable in Common Stock of the Company to be issued during the second quarter of
fiscal year 1998. The Common Stock to be issued is based upon the average price
of the stock during the five business days prior to the issuance. The value of
the Common Stock to be issued has been recorded in other long term liabilities
at 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 $300,000 was paid in the
form of a convertible note with a maturity in May 1997. The Company has the
option to make such $300,000 payment at its discretion in either cash or Common
Stock of the Company with such number of shares to be based upon the average
price of the stock during the five business days preceding such date. The
purchase price has been allocated to the assets at their fair market value,
including management service agreements of approximately $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 $550,954
of such purchase price is payable in Common Stock of the Company to be issued
during May and June 1997. The number of shares of Common Stock of the Company to
be issued is based upon the average price of the stock during the five business
days prior to the issuance. The value of the Common Stock to be issued has been
recorded in other long term liabilities at 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.
12
<PAGE>
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 $280,000 is payable during July 1997 in Common Stock of the
Company with such number of shares to be based upon the average price of the
stock during the five business days prior to the issuance. The value of the
Common Stock to be issued has been recorded in other long term liabilities at
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 $1,920,000 is payable during August 1997 in Common Stock of the
Company with such number of shares to be purchased based upon the average price
of the stock during the five business days prior to the issuance. The value of
the Common Stock to be issued has been recorded in other long term liabilities
at 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 $692,800 is payable during August 1997 in Common Stock of the Company
with such number of shares to be purchased based upon the average price of the
stock during the five business days prior to the issuance. The value of the
Common Stock to be issued has been recorded in other long term liabilities at
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 $2,374,400 is payable during August 1997 in Common Stock of the Company
with such number of shares to be purchased based upon the average price of the
stock during the five business days prior to the issuance. The value of the
Common Stock to be issued has been recorded in other long term liabilities at
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 $535,000 is payable during October 1997 in Common Stock of the
Company with such number of shares to be purchased based upon the average price
of the stock during the five business days prior to the issuance. The value of
the Common Stock to be issued has been recorded in other long term liabilities
at 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.
13
<PAGE>
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 has been 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.
Accounting Treatment
The Company's relationships with its affiliated physicians are set forth in
various asset and stock purchase agreements, management service agreements, and
employment and consulting agreements. Through the asset and/or stock purchase
agreement, the Company acquires the equipment, furniture, fixtures, supplies
and, in certain instances, service agreements, of a physician practice at the
fair market value of the assets. The accounts receivable are typically purchased
at the net realizable value. The purchase price of the practice generally
consists of cash, notes and/or Common Stock of the Company and the assumption of
certain debt, leases and other contracts necessary for the operation of the
practice. The management services or employment agreements delineate the
responsibilities and obligations of each party.
Net revenues from management service agreements include the revenues
generated by the physician practices. The Company is 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 receive 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 three months ended April 30, 1997 and
the year ended January 31, 1997 were $35.7 million and $90.2 million,
respectively.
Medical Support Service Companies Acquisition
During October 1996, the Company purchased the assets of an outpatient
ambulatory surgical center in Florida. The Company entered into a lease whereby
the surgical center was leased to a partnership with an initial term of 15
years. In addition, the Company entered into a 20-year management agreement
pursuant to which the Company receives a management fee which is based upon the
performance of the surgical center. The purchase price for these
14
<PAGE>
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.
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 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
MSOs 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 pre-tax earnings thresholds are achieved. The Company has committed to
fund approximately $2,400,000 to Network during the next three years. Such
advances can be in the form of a demand loan or for additional ownership
interests if the other owners do not elect to contribute their pro-rata share of
any additional capital contribution ($100,000 of additional capital contribution
for an additional 1% interest) in Network. During the first three years the
Company has the option to purchase
15
<PAGE>
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 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
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 Service 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. In connection with the Pinnacle merger there is a
$5,200,000 maximum payment that may be required to be paid based on earnings and
will be made in the form of shares of Common Stock of the Company valued as of
the earnings measurement date. The contingent consideration represents the full
purchase price. 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
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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 Service Companies Acquisitions
During September 1994, an 80% owned subsidiary of the Company purchased
substantially all of the assets of Uromed Technologies, Inc. ("Uromed"), a
provider of lithotripsy services in Florida, for a 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
Three Months Ended April 30, 1997 Compared to Three Months Ended April 30, 1996
The following discussion reviews the results of operations for the three
months ended April 30, 1997 (the "1997 Quarter") compared to the three months
ended April 30, 1996 (the "1996 Quarter"), respectively.
Revenues
The Company derives revenues from health care services and medical
facility development services. Within the health care segment, the Company
distinguishes between revenues from cancer services, 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, and ambulatory
surgery.
Net revenues were $70.2 million for the 1997 Quarter. Of this amount,
$25.5 million or 36.3% of such revenues was attributable to cancer services;
$32.0 million or 45.6% was related to noncancer physician services; $7.4
million or 10.6% of such revenues was attributable to other medical support
services; and $5.3 million or 7.5% related to medical facility development.
Net revenues were $37.2 million for the 1996 Quarter. Such revenues
consisted of $21.1 million or 56.8% related to cancer services; $7.2 million or
19.4% related to noncancer physician services; $5.2 million or 13.9% related to
other medical support services; and $3.7 million or 9.9% related to medical
facility development.
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Expenses
The Company's cost of affiliated physician management services was $17.0
million or 47.6% of net revenue from management services agreements during the
1997 Quarter. The cost of affiliated physician management services was $8.5
million or 49.7% of net revenue from management services agreements during the
1996 Quarter. Net revenue for the physician practices managed by the Company was
$35.7 million during the 1997 Quarter and $17.2 million during the 1996 Quarter.
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 $4.7 million from
$11.7 million or 31.3% of net revenues during the 1996 Quarter to $16.4 million
or 23.3% of net revenues during the 1997 Quarter. The decrease as a percentage
of net revenues is primarily attributable to the fact that since the Company's
commencement of operations during the third quarter of 1994, it has been able
to spread its salaries, wages, and benefits over a rapidly expanding revenue
base.
The Company's supplies expense increased by $3.4 million from $5.5 million
or 14.7% of net revenues during the 1996 Quarter to $8.9 million or 12.7% of
net revenues during the 1997 Quarter. 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 $0.6
million from $1.6 million or 4.3% of net revenues during the 1996 Quarter to
$2.2 million or 3.1% of net revenues during the 1997 Quarter. The increase is
primarily a result of the acquisitions completed after the 1996 Quarter and the
allocation of the purchase prices as required per purchase accounting. During
the 1997 Quarter 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 Quarter. These nonrecurring items have been included in
other expenses on the statement of operations.
The Company's rent expense increased by $1.4 million from $1.7 million or
4.6% of net revenues during the 1996 Quarter to $3.1 million or 4.4% of net
revenues during the 1997 Quarter. Rent expense 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 a particular geographic market. The Company's net interest
expense increased by $0.4 million from $0.3 million or 1% of net revenues
during the 1996 Quarter to $0.7 million or 1% of net revenues during the 1997
Quarter.
Medical Facility Development
The Company, through its investment in DASCO, provides medical facility
development services to related and unrelated third parties in connection with
the establishment of health parks, medical malls and medical office buildings.
The Company believes that the development of such facilities, in certain
markets, will aid in the integration of its affiliated physicians and medical
support services and will provide future opportunities to affiliate with
physicians and acquire future physician practices or support services. Further,
the Company believes that the development of health parks, medical malls and
medical office buildings in certain markets will aid in the integration of its
affiliated physicians and medical support services.
The Company derives its medical facility development service revenues from
the provision of a variety of services. In rendering such services, the Company
generates income without bearing the costs of construction, expending
significant capital or incurring substantial indebtedness. 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
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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 Quarter, the Company's medical facility
development generated revenues of $5.3 million and pretax income of $3.2
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
The Company derives revenues from health care services and medical facility
development services. Within the health care segment, the Company distinguishes
between revenues from cancer services, non-cancer physician services and other
medical support services. Cancer services include physician practice management
services to oncology practices and certain medical support services, including
radiation therapy, diagnostic imaging and infusion therapy. Non-cancer physician
services primarily included physician practice management services to all
practices managed by the Company other than oncology practices and
administrative services to health plans which includes 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 healthcare management services and ambulatory
surgery.
Net revenues were $190.0 million during 1997. Of this amount, $95.0 million
or 50.0% of such revenues was attributable to cancer services; $55.4 million or
29.1% was related to non-cancer physician services; $20.6 million or 10.9% of
such revenues was attributable to other medical support services; and $19.0
million or 10.0% related to medical facility development. At January 31, 1997,
the Company had affiliations with 226 physicians.
Net revenues were $70.7 million during 1995. Of this amount, $44.9 million
or 63.5% of such revenues was attributable to cancer services; $7.7 million or
10.9% related to non-cancer physician services; and $18.1 million or 25.6%
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.
The Company's salaries, wages and benefits increased by $20.3 million from
$32.0 million or 45.2% of net revenues during 1995 to $52.3 million or 27.5% of
net revenues during 1997. The decrease as a percentage of net revenues is
primarily attributable to the fact that since the Company's commencement of
operations during the third quarter of 1994, it has been able to spread its
salaries, wages and benefits over a rapidly expanding revenue base.
The Company's supplies expense increased by $15.1 million from $11.8
million or 16.8% during 1995 to $26.9 million or 14.2% 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 $3.3
million from $3.8 million or 5.5% of net revenues during 1995 to $7.1 million or
3.8% 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
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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 $3.2 million from $4.5 million or
6.4% of net revenues during 1995 to $7.7 million or 4.0% 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 $3.2 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.
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 Period from June 24, 1994 to December
31, 1994
The following discussion reviews the historical results of operations for
the year ended December 31, 1995 ("1995") and the period from June 24, 1994 to
December 31, 1994 (the "1994 Period").
All of the entities acquired by the Company 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
Net revenues of $2.4 million for the 1994 Period include revenues from the
acquisitions completed during the period September through December 1994. Of
this amount, $.7 million or 28% of such revenues was attributable to cancer
services; and $1.7 million or 72% of such revenues was attributable to other
medical support services. The Company had no physician related revenues during
this period.
Net revenues of $70.7 million for 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 63% related to cancer
services; $7.7 million or 11% related to non-cancer physician services; and
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$18.1 million or 26% related to other medical support services. As of December
31, 1995, the Company had affiliations with 55 physicians providing cancer
related services, 14 employed primary care physicians, and 34 other multigroup
of specialty physicians.
Expenses
For the 1994 Period and for 1995, total operating and administrative
expenses were $3.7 million and $77.5 million, respectively. In the 1994 Period
and 1995, operating and administrative expenses exceeded revenues due to the
commencement of operations of the Company. 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 provided by operating activities was $2.2 million for the 1997
Quarter. Cash used by operating activities was $0.7 million for the 1996
Quarter. During the 1997 Quarter, the cash provided by operating activities
resulted from the increased profitability of the Company's operations.
Cash used by investing activities was $7.9 million and $3.5 million for
the 1997 Quarter and 1996 Quarter, respectively. This primarily represents the
funds required by the Company for the acquisition of physician practices and
medical support services companies, along with the advances under notes
receivables of $5.5 million during the 1997 Quarter. In addition, during the
1997 Quarter, the Company sold one of its radiation therapy centers that had
been previously closed for $1.5 million.
Cash used by financing activities was $0.6 million for the 1997 Quarter
and primarily represented the repayment of debt of $0.9 million and the release
of restricted cash collateralizing debt of $0.5 million. Cash used by financing
activities was $7.7 million for the 1996 Quarter which primarily represented
$3.8 million of repayments to shareholder and the repayment of $2.9 million in
debt outstanding.
At April 30, 1997, the Company's principal sources of liquidity consisted
of working capital of $106.7 million which includes $73.7 million in cash. The
Company also has $29.9 million of current liabilities, including approximately
$3.7 million of indebtedness maturing before April 30, 1998.
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 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 April 30, 1997 the Company had committed to issue $11.1 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.
The Company expects that the existing working capital of $106.7 million
which includes cash of $73.7 million and cash generated from operations and
amounts to be made available under an acquisition/working capital line for
which the Company is in the process of obtaining a commitment from a bank will
be adequate to satisfy the Company's cash requirements for the next 12 months.
However, there can be no assurance that the Company will not be required to
seek additional financing during this period. The failure to raise the funds
necessary to finance its future cash requirements would adversely affect the
Company's ability to pursue its strategy and could adversely affect its results
of operations for future periods.
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BUSINESS
General
The Company is a multi-specialty 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 through the management of independent
physician associations ("IPAs") and specialty care physician networks by
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 and ambulatory surgery. Since
its first acquisition in September 1994, the Company has acquired the practices
of and entered into long term agreements to affiliate with 300 physicians; has
obtained interests in MSOs in Connecticut, Georgia, New Jersey, New York and
Florida that provide management services to IPAs composed of over 3,700
multi-specialty physicians; purchased a company that provides contract
management services to approximately 2,400 physicians in specialty care
networks; and acquired several medical support service companies and a medical
facility development company.
The Company believes that its strategy of developing management networks in
specific geographic locations creates synergies, achieves operating efficiencies
and responds to the cost-containment initiatives of payors, particularly managed
care companies. To date, the Company has acquired the practices of and
affiliated with 73 oncologists and provides comprehensive cancer-related support
services including radiation therapy, infusion therapy and diagnostic imaging.
The Company has contracts with managed care organizations under which the
Company and its affiliated physicians provide cancer-related health care
services to over 230,000 covered lives. In addition, through management of
contracts with 2,400 physicians the Company facilitates the delivery of
specialty health care services to approximately 7,300,000 member patients. The
Company plans to continue to increase its managed care capabilities into
additional specialty care physician networks and to expand existing
relationships with established managed care organizations. The Company also
intends to develop additional disease management networks for the treatment of
other chronic illnesses such as diabetes, cardiovascular diseases and infectious
diseases.
In certain targeted markets, the Company organizes its affiliated
physicians and related medical support services into integrated clusters of
disease specialty and primary care networks, which it terms local provider
networks ("LPNs"). LPNs are designed to provide a comprehensive range of
physician and medical support services within specific geographic regions. The
Company believes that its LPN structure achieves operating efficiencies and
enhances its ability to secure contracts with managed care organizations. To
date, the Company is developing LPNs in each of the Florida, Atlanta,
Washington, D.C./Baltimore areas and the tri-state area of Connecticut, New
York and New Jersey.
As part of its strategy to integrate physician practices, the Company
provides medical facility development services to related and unrelated third
parties for the development of health parks, medical malls and medical office
buildings. Such services include project finance assistance, project
management, construction management, construction design engineering, physician
recruitment, leasing and marketing. While the Company incurs certain
administrative and other expenses in the course of providing such services, it
does not incur costs of construction or risks of project ownership. The
Company's strategy in financing its projects is to involve future tenants as
significant investors in and owners of the developed medical facilities.
Because most of its tenants are physicians and medical support service
companies, the Company believes that the relationships that it develops with
these parties through its medical facility development efforts also enhances
the Company's ability to affiliate with physicians and acquire physician
practices and medical support service companies. Further, the Company believes
that the development of health parks, medical malls and medical office
buildings in certain markets will aid in the integration of its affiliated
physicians and medical support services.
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Recent Developments
During March 1997, the Company signed a binding letter of intent to merge
with Clinical Studies, Ltd. ("CSL"), a pioneer in the field of clinical
investigative site management. CSL is one of the largest site management
organizations ("SMOs") in the country. SMOs are management service companies
that organize and manage multisite clinical investigators. CSL wholly owns and
operates 19 Phase I-IV research centers and is dedicated to the rapid
enrollment of quality volunteers for investigational drug research in multiple
therapeutic areas such as central nervous system, gerontology, women's health
and endocrinology. The Company believes that the merger will by synergistic for
both companies. The Company will provide CSL access to a key ingredient in the
success of clinical research, access to a broad array of physicians and
patients. In turn, the Company will be able to provide its affiliated
physicians with added value of numerous clinical research opportunities.
During April 1997, the Company signed a letter of intent with Beth Israel
Health Care System to form an MSO to provide management services to the medical
community in the greater metropolitan New York area. The Company will acquire
and manage the physician practice management operations of Beth Israel Health
Care System, which consists of 130 physicians with more than 20 primary and
specialty medical offices located throughout New York City and Rockland and
Westchester counties. This is consistent with the Company's strategy of rapid
expansion in the New York marketplace.
While the Company intends to pursue the consummation of the transactions
described in these letters of intent, there can be no assurance that these
transactions will be consummated.
Industry
Overview
The Health Care Financing Administration estimates that health care
spending in 1995 exceeded $1 trillion with more than $240 billion directly
attributable to physician services. Increasing concern over the cost of health
care in the United States has led to numerous initiatives to contain the growth
of health care expenditures, particularly in the government entitlement
programs of Medicare and Medicaid. These concerns and initiatives have
contributed to the growth of managed care. Managed care typically involves a
third party (frequently the payor) governing the provision of health care with
the objective of ensuring delivery in a high quality and cost effective manner.
One method for achieving this objective is the implementation of capitated
payment systems in which traditional fee for service methods of compensating
health care providers are replaced with systems that create incentives for the
provider to manage the health care needs of a defined population for a set fee.
Health care in the United States historically has been delivered by a
fragmented system of health care providers, including hospitals, individual
physicians and small groups of specialist and primary care physicians. The
focus on cost containment has placed many solo practices, small to mid-sized
physician groups and single specialty group practices at a significant
disadvantage because they typically have high operating costs relative to
revenue and little purchasing power with vendors of supplies. These physician
practices often lack the capital to purchase new clinical equipment and
technologies, such as information systems, necessary to enter into
sophisticated risk sharing contracts with payors. Additionally, these
physicians often do not have formal ties with other providers nor the ability
to offer coordinated care across a variety of specialties, thus reducing their
competitive position, particularly with managed care companies, relative to
larger provider organizations.
As a result of these changes in the market place, physicians are
increasingly abandoning traditional private practice in favor of affiliations
with larger organizations, such as the Company, that offer sophisticated
information systems, management expertise and capital resources. Many payors
and their intermediaries, including governmental entities and HMOs, are
increasingly looking to outside providers of physician management services to
develop and maintain quality outcome management programs and patient care data.
In addition, such payors and intermediaries look to share the risk of providing
health care services through capitation arrangements which provide for fixed
payments for patient care over a specified period of time.
Disease management is the comprehensive management of a patient's medical
care as it relates to the treatment of a specific chronic illness. The
provision of cancer care represents a significant and growing part of the
disease management market. Because more than 100 complex diseases compose what
is commonly termed cancer, its treatment often requires a multi-disciplinary
approach, involving numerous health care professionals with different
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specializations and a variety of treatment settings, including physician
offices, hospitals, outpatient facilities and free-standing cancer treatment
centers. Cancer treatment centers may provide certain services, including
radiation therapy and infusion therapy, but they generally do not integrate
these services with physician practices. The Company believes that the current
fragmented system for treating cancer is inefficient, costly and inhibits
effective disease management.
The Company believes that the development of disease specialty networks
provides a substantial opportunity both to derive significant synergies and
operating efficiencies and to contract with managed care companies for a full
continuum of disease specific care. The Company expects the development of such
networks and systems not only to enhance productivity and improve the quality
of care, but also to meet the cost containment objectives of third party
payors. The Company believes that the evolution of disease specialty treatment
networks will play a major role in managed care contracting as payors recognize
that both cost savings and the quality of care are improved when reimbursement
and health care services target a specific illness or disease through
coordinated networks of health care providers.
Strategy
The Company's strategy is to develop, operate and manage integrated
disease specialty and primary care physician networks in specific geographic
locations by affiliating with physicians, medical networks and health care
businesses. The key elements of this strategy are to:
Increase Physician Affiliations. The Company affiliates with physicians by
acquiring their practices and entering into long-term management agreements
with the acquired practices, by managing IPAs through MSOs in which the Company
has ownership interests and by providing contract management services to
physicians in specialty care networks. By affiliating with leading physicians
and physician groups in a given community, the Company can secure a large
patient base, ensure appropriate, quality treatment and maintain patient
satisfaction. Additionally, as the Company affiliates with physicians in
certain markets, it makes available to these physicians medical support
services, including the Company's radiation therapy, diagnostic imaging,
lithotripsy, infusion, home health care services, and ambulatory surgery. By
integrating these acquired disease specialty and primary care medical practices
with related medical support services, the Company is able to develop a
continuum of care in its target markets. The Company believes that its
affiliations with additional physicians through IPAs will enable it to increase
its market share. IPAs and MSOs allow individual practitioners to access
patients in their respective areas through contracts with HMOs without having
to join a group practice.
Develop Practice Networks. In conjunction with its acquisition strategy,
the Company seeks to build integrated LPNs of disease specialty and primary
care physicians in targeted markets. The Company typically acquires a core
physician practice or affiliates with an IPA. The Company then seeks to acquire
or affiliate with additional physician practices and medical support services.
Through the implementation of this strategy, the Company seeks to provide a
comprehensive range of health care services within a given region, thereby
enhancing its ability to enter into contractual arrangements with managed care
organizations.
Facilitate Acquisitions and Integration Through Development. As a part of
its strategy to affiliate with physicians and acquire physician practices and
medical support service companies, the Company provides medical facility
development services to related and unrelated third parties for the
establishment of health parks, medical malls and medical office buildings. The
Company believes that the relationships that it fosters with physicians and
medical support service companies (which may be tenants and/or owners of the
medical facilities developed by the Company), enhances the Company's
affiliation and acquisition prospects and aids in the integration of its
affiliated physicians and medical support service companies.
Contract with Managed Care Companies. The Company actively pursues
contractual arrangements with managed care organizations. Within its LPNs, the
Company seeks to provide an appropriate balance of physician and medical
services to attract managed care payors. Depending upon the particular market,
the Company may develop disease specialty networks which can be used to procure
managed care contracts pursuant to which the Company's affiliated physicians
are responsible for providing all or a portion of disease specific health care
services to a particular patient population, or the Company may develop a
broader array of services designed to enhance its ability to attract
comprehensive managed care contracts. In addition, the Company manages the
contracts of
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specialty care physicians with managed care companies in order to facilitate
the delivery of services in specialty health care networks.
Implement Integrated Information Systems. The Company intends to continue
to develop its integrated information management systems so as to improve
patient care by improving physician access to patient information. The Company
believes that its data processing capabilities further enhances its ability to
service managed care contracts by providing access to the clinical and
financial data necessary to perform outcome studies, cost analyses, utilization
reviews and other analyses which can provide the information necessary for the
managed care community to evaluate and contract with the Company and its health
care providers.
Achieve Operating Efficiencies. The Company seeks to achieve operating
efficiencies through the consolidation of physician practices. By consolidating
overhead, including billing, collections, accounting and payroll, the Company
believes that it can realize operating efficiencies. In addition, by rendering
support and management functions, the Company enables its affiliated physicians
to spend a higher proportion of their time with patients, thereby improving
patient care and enhancing revenue.
Physician Affiliations Through Management Agreements and Employment Agreements
To date, the Company has affiliated through management and/or employment
agreements with 300 physicians in the following locations:
<TABLE>
<CAPTION>
No. of
Physicians
Under
LPN Contract Specialties
- ------------------------------------- ------------ ----------------------------------------------------
<S> <C> <C>
Florida ........................ 162 Primary Care, Oncology, Cardiology,
Gastroenterology, Podiatry, Rheumatology,
Obstetrics-Gynecology, General and Vascular
Surgery, Dermatology, Pulmonary, Orthopedic and
Radiology
Atlanta ........................ 52 Oncology, Gastroenterology, Urology and Surgery
Washington, D.C./Baltimore ...... 45 Primary Care, Oncology, Cardiology,
Gastroenterology, Infectious Diseases, Geriatrics,
Pediatrics, Radiology, Neurology and Internal
Medicine
Connecticut/New York/New Jersey 10 Primary Care and Radiology
Other Markets .................. 31 Primary Care, Oncology, Obstetrics-Gynecology,
---- Surgery and Pediatrics
Total Physicians ............... 300
</TABLE>
The Company affiliates with physicians through management agreements with
physician practices or employment agreements with individual physicians. When
affiliating in this manner, the Company generally acquires the assets of the
physician practice, including its equipment, furniture, fixtures and supplies
and, in some cases, service contracts and goodwill. Currently, the Company
manages the practices of 268 physicians and employs another 32 physicians.
The Company's relationships with its affiliated physicians are set forth
in various asset purchase, management services, employment and consulting
agreements. Through the asset purchase agreement, the Company acquires at fair
market value the assets of a physician practice. Accounts receivable are
typically purchased at the net realizable value. The purchase price of the
assets of a physician practice generally consists of cash and/or stock and the
assumption of certain debt, leases and other contracts necessary for the
operation of the practice.
The Company and its affiliated physicians enter into management services
or employment agreements which delineate the responsibilities and obligations
of each party. The management services agreements generally have a 10 to
40-year term. The employment agreements generally have a seven to 10-year term,
and in most instances, the contracting physicians can extend the terms of their
employment agreements in five-year increments for an unlimited duration until
they reach a specified age. The management services agreements provide that the
physicians
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<PAGE>
are responsible for the provision of all medical services and the Company is
responsible solely for the management and operation of all other aspects of the
affiliated practice. The Company provides the equipment, facilities and
supplies necessary to operate the medical practice and employs substantially
all of a practice's non-physician personnel, except those whose services are
directly related to the provision of medical care. The management and
administration of the practice, including managed care contracting, rests with
the Company. Generally, a management services agreement with a physician
practice group cannot be terminated by either the Company or the practice group
prior to its stated expiration date without cause. The Company's employment
agreements generally are terminable by the physicians upon 90 to 180-days
notice. Ordinarily, the Company reserves the right to renegotiate terms of the
management services agreement if there are significant changes in reimbursement
levels. Upon termination for cause or at the expiration of a physician's
relationship with the Company, the Company has the right to require the
affiliated physicians to repurchase certain assets originally purchased by the
Company and assets acquired during the term of the relationship.
For providing services under management services agreements entered into
prior to April 30, 1996, physicians generally receive a fixed percentage of net
revenue of the practice. "Net revenue" is defined as all revenue computed on an
accrual basis generated by or on behalf of the practice after taking into
account certain contractual adjustments or allowances. The revenue is generated
from professional medical services furnished to patients 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 three months ended April 30, 1997
were $35.7 million.
The Company believes a shared governance approach is critical to the
long-term success of a physician practice management company. In this regard,
the Company's agreements provide for physician concurrence on critical
strategic issues such as annual operating and capital budgets, fee structures
and schedules and the practice's strategic plan. The strategic plan developed
for the affiliated physician practices addresses both the future addition of
practitioners and the expansion of locations and services. The Company works
closely with its affiliated physicians to target and recruit new physicians and
merge with or integrate other groups and specialties.
Physician Affiliations Through IPAs and Contract Management
The Company owns an MSO that provides management services to an IPA
composed of over 400 physicians based in Connecticut, a 50% interest in an MSO
that provides management services to an IPA composed of 59 primary care
physicians in Georgia, an 80% interest in an MSO that provides management
services to an IPA composed of over 650 physicians in New Jersey, a 51% interest
in an MSO that provides management services to an IPA composed of over 1,000
physicians in New York and 50% interests in two IPAs in Florida composed of
approximately 1,500 physicians. An IPA is generally composed of a group of
geographically diverse independent physicians who form an association for the
purpose of contracting as a single entity. The IPA structure not only increases
the purchasing power of the constituent practices, but also provides a
foundation for the development of an integrated physician network. The Company
believes that many IPAs will merge with other practice groups to develop larger
integrated medical groups, thereby becoming increasingly attractive to managed
care companies. The Company intends to capitalize on its affiliations with IPAs
to establish additional LPNs.
The Company recently expanded its managed care contracting capabilities
through the purchase of Physicians Consultant & Management Corporation ("PCMC"),
which provides management services to national and local physician specialty
care networks containing approximately 2,400 physician members. Through its
specialty care networks, PCMC facilitates the delivery of health care services
to approximately 7,300,000 member patients. The Company plans to continue to
increase its managed care capabilities into additional specialty care physician
networks to expand existing relationships with established managed care
organizations.
The Company also seeks to enter into agreements to manage capitated
provider networks. The Company expects that under these agreements, it would
receive a fixed management fee based upon contract revenues as well as a
certain percentage of risk pools.
26
<PAGE>
Medical Support Services
As part of its strategy to provide a comprehensive range of health care
services in its markets, the Company provides certain medical support services
related to the management of disease and episodic care, including radiation
therapy, diagnostic imaging, infusion therapy, home health care, lithotripsy
services and ambulatory surgery. These services are provided both as part of
the Company's LPN structure and separately in certain markets in which there is
a competitive advantage to do so.
Within the scope of its disease specialty networks, the Company delivers a
broad array of medical support services. The Company supports its cancer
networks with radiation therapy (the Company has 10 radiation therapy centers in
six states), infusion therapy (the Company provides infusion therapy in several
states which are managed from three regional offices), diagnostic imaging (the
Company has five centers in four states), home health care services (the Company
provides home health care services in six South Florida counties which are
managed from five local offices) and ambulatory surgery (the Company manages one
ambulatory surgery center).
The Company also provides lithotripsy services and currently operates one
fixed site and seven mobile lithotripters which provide lithotripsy services in
Arkansas, Florida, Indiana, Kansas, Kentucky, Missouri, Oklahoma, Tennessee and
Texas. These services are managed from three regional offices. Lithotripsy is a
non-invasive procedure that utilizes shock waves to fragment kidney stones, and
is the preferred alternative to surgery for kidney stones, suitable for the
treatment of over 90% of the applicable patients. The Company provides its
mobile lithotripsy services under contracts with approximately 70 hospitals and
other health care facilities. The hospital or health care facility normally pays
the Company on a per procedure basis. The Company's contracts with such
hospitals and facilities generally have terms of one to three years.
LPNs
The Company has established and is developing LPNs in the Florida,
Atlanta, Connecticut/New York/New Jersey and Baltimore/Washington, D.C. areas
as its initial target LPN markets. To further develop its LPNs, the Company
intends to affiliate with additional physician group practices and acquire,
develop or affiliate with related medical support services. When entering new
target markets, the Company will either seek to acquire a core practice group
or manage an IPA. The Company undertakes market analyses and demographic
studies to evaluate the business opportunities in a particular geographic area
and seeks to capitalize on these opportunities by developing relationships with
appropriate physicians and other health care providers. Within each LPN, the
Company seeks a balance between primary care and specialty physicians and to
integrate certain related medical support services for the ultimate purpose of
providing a strategic network of comprehensive medical services attractive to
managed care and risk-based third party contractors. In certain markets, the
Company establishes relationships with unaffiliated entities for the purpose of
contracting with managed care companies.
In keeping with its major strategy of expanding its Northeast presence in
New York, New Jersey and Connecticut, the Company has affiliated with
approximately 2,050 physicians through IPAs, with more than 1,000 in New York's
five boroughs, 400 in Connecticut and 650 in New Jersey. In October 1996, the
Company agreed to an exclusive arrangement with North Shore Health System of
Manhasset, New York, to jointly develop, own and operate medical facilities in
five metropolitan New York counties. In addition, in November 1996, the Company
was selected by the Health Insurance Plan of New Jersey ("HIP") to assist in
reorganizing the medical delivery services in 18 health care centers. During
April 1997, the Company signed a letter of intent with Beth Israel Health Care
System to form an MSO to provide management services to the medical community
in the greater metropolitan New York area. The Company will acquire and manage
the physician practice management operations of Beth Israel Health Care System,
which consists of 130 physicians with more than 20 primary and specialty
medical offices located throughout New York City and Rockland and Westchester
counties.
The development of the Company's Atlanta LPN provides an example of the
implementation of the Company's development strategy. In Atlanta, the Company
acquired three radiation centers in March 1995 and has since created a
comprehensive cancer disease management network of 24 oncologists in 17 sites.
The Company's Atlanta LPN continues to develop by affiliating with primary care
and multi-specialty groups to create a comprehensive, fully-integrated regional
network. This network currently includes affiliations through management and/or
employment agreements with 52 physicians and through an IPA with 59 physicians.
The Company is presently negotiating with additional physician providers and is
assessing the opportunity to create a comprehensive health park in the Atlanta
area.
27
<PAGE>
In the Florida market, the Company initially developed affiliate
relationships with six primary care physicians. The Company has currently
affiliated through management and/or employment agreements with 162 physicians
which includes 21 oncologists and the Company operates a cancer care network
which through capiated managed care contracts provides services to
approximately 149,000 covered lives. The Company also has affiliated through
IPAs with approximately 1,500 physicians. In addition, the Company provides
infusion therapy, home health, diagnostic, rehabilitation services and
ambulatory surgery in its Florida LPN.
In the Washington, D.C./Baltimore area, the Company operates three
radiation centers and provides infusion therapy services through its managed
care contracts and physician affiliations. The Company has affiliated with 45
physicians including 10 medical and radiation oncologists. In addition, the
Company has entered into an agreement with the Medlantic Healthcare Group in
Washington, D.C. (and its Washington Hospital Center and Washington Cancer
Institute) for the formation and operation of the Washington Regional Oncology
Network. This network will be dedicated to obtaining contracts for cancer care
in the Washington region and also includes the formation of a joint venture for
the management of the Washington Ambulatory Infusion Center.
The Company has entered into management and employment agreements with 73
oncologists. Net revenues for cancer related services for the three months
ended April 30, 1997 were $25.5 million. In its Florida, Atlanta and
Washington, D.C./Baltimore LPNs, the Company has assembled three discrete
networks of cancer physicians and related cancer care services, and as a
result, the Company provides services pursuant to managed care contracts to
over 230,000 covered lives. Under these contracts, the Company and its
affiliate physicians provide some or all of the following services: medical and
radiation oncology services, bone marrow transplants, infusion therapy,
diagnostic services and home care. The Company has also developed cancer care
networks with unaffiliated entities for contracting purposes in certain
markets.
Medical Facility Development
The Company provides medical facility development services to related and
unrelated third parties for the establishment of health parks, medical malls
and medical office buildings. A "health park" is an integrated health care
environment composed of several buildings which links physician practices,
medical support services and subacute care facilities on a single campus. A
"medical mall," often found in a health park, combines physician offices with
related medical support services such as diagnostic imaging, physical
rehabilitation, laboratory services and wellness programs in one facility. The
Company also develops office buildings which serve physicians and providers of
ancillary medical services.
The Company believes that the convenience of "one-stop" scheduling and
medical related services together with on-site treatment provided at the
Company's developed medical facilities will increase patient satisfaction and
cost-efficiency. By providing a centralized delivery site for state-of-the-art
technology, information systems and patient care models, a full continuum of
care can be provided by a wide range of physician specialties and medical
support services at one location. The Company believes that physicians will
find affiliation with such facilities attractive and that third party payors
will seek to contract with physician practices and related medical support
service companies operating in such facilities.
The Company's medical facility development services include project finance
assistance, project management, construction management, construction design
engineering, consulting, physician recruitment, leasing and marketing. The
Company currently has 19 projects under development and has facilities under
construction in Florida, Texas, California, New Jersey, Nevada and Arizona. The
Company also has seven projects under contract and anticipates that construction
of such facilities will begin during the next six months.
Under its development agreements, the Company is generally obligated to
secure funding for and guaranty the maximum cost of a project. In order to
minimize the risks from these obligations, the Company enters into construction
agreements with general contractors to construct the project for a "guaranteed
maximum cost." Furthermore, each construction agreement provides for
indemnification of the Company by the general contractor for certain losses and
damages. Each construction agreement also requires the contractor to obtain and
maintain a performance bond and a labor and material payment bond, written by a
surety company with a Best's Key Guide Rating of not less than A+12 and
satisfactory to the owner of the land on which a project is developed and the
construction lender.
28
<PAGE>
Among the Company's development clients are some of the largest for-profit
public hospital companies in the United States. To date, the Company's clients
and primary negotiators of the Company's fees generally have been the land
owners or land lessors of the developed sites. Negotiations generally include
the Company, the entities which own the developed projects, the land lessor (if
applicable) and, in many cases, the prospective tenants of the office space.
The Company offers its physician-tenants an opportunity to become equity
investors in the facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Medical Facility Development."
The compensation received by the Company is based upon negotiated amounts for
each service provided. Although the Company does not maintain an ownership
interest in the facilities it develops, certain of the Company's officers and
directors have an interest in such facilities. In each transaction between the
Company and a facility in which certain of its officers and directors have an
interest, third parties, including the land owners and land lessors of the
sites and the unaffiliated investors in the facility, participate in
establishment of fees to the Company. All transactions between the Company and
affiliated owners and physicians are and will continue to be based upon
competitive bargaining and are and will be on terms no less favorable to the
Company than those provided to unaffiliated parties. In addition, the Company
monitors development fees in the industry to ensure that its fees in such
transactions meet this standard.
The Company believes that its medical facility development services and
project finance strategy are a significant component of the Company's overall
business strategy. The Company's project finance strategy focuses upon the
involvement of its future tenants as significant investors in and owners of the
medical facilities developed by the Company. Because its tenants are physicians
and medical support service companies, the Company believes that the
relationships that it develops through its medical facility development efforts
also enhances the Company's ability to affiliate with physicians and acquire
physician practices and medical support service companies. The development of
medical facilities by the Company is intended to enhance the creation of the
new group practices, increase the number of integrated medical service delivery
sites and promote alternative delivery models for third party payors in its
developed sites. The Company believes that such activity, in turn, will aid in
the integration of its affiliated physicians and medical support service
companies.
Information Systems
The Company believes that effective and efficient integration of clinical
and financial data provides a competitive advantage in bidding for managed care
contracts and contributes to a company's success in the complex reimbursement
environment of the health care industry. The Company also believes that the use
of technology can improve patient care by improving physician access to patient
information. Therefore, the Company is in the process of selecting and
implementing management information systems designed to facilitate the
transmittal and coordination of important patient and operational data. The
Company's objective is to implement a system which consists of three specific
areas: practice management, electronic clinical records and comprehensive care
and management reporting. The implementation of the systems selected will occur
in stages, as the Company continues to analyze and support the systems in place
in its existing and acquired physician practices and medical support service
companies.
Competition
The physician practice management industry is highly competitive. The
Company competes with local and national providers of physician management and
certain other medical services and for the recruitment of physicians. Certain
of the Company's competitors have access to substantially greater financial,
management and other resources than the Company. The majority of the
competition faced by the Company is based primarily on cost and quality. Each
of the affiliated physicians has entered into an agreement not to compete with
the operations of the Company both during the term of the applicable agreement
and for a period of one year or greater thereafter.
Government Regulation
Various state and federal laws regulate the relationship between providers
of health care services, physicians and other clinical services. As a business
in the health care industry, the Company is subject to these laws and
regulations. The Company's medical support services, for example, are subject to
various licensing and certification requirements including Certificate of Need
regulations. The Company is also subject to laws and regulations relating to
business corporations in general. The Company believes its operations are in
material compliance with applicable
29
<PAGE>
laws; however, the Company has not received a legal opinion from counsel that
its operations are in material compliance with applicable laws and many aspects
of the Company's business operations have not been the subject of state or
federal regulatory interpretation. Moreover, as a result of the Company
providing both physician practice management services and medical support
services, the Company may be the subject of more stringent review by regulatory
authorities, and there can be no assurance that a review of the Company's or
the affiliated physicians' businesses by courts or regulatory authorities will
not result in a determination that could adversely affect the operations of the
Company or the affiliated physicians or that the health care regulatory
environment will not change so as to restrict the Company's or the affiliated
physicians' existing operations or their expansion.
The laws of many states prohibit business corporations such as the Company
from practicing medicine and employing physicians to practice medicine. In
those states where the Company employs physicians, it believes its operations
are in material compliance with applicable laws. The Company does not exercise
influence or control over the practice of medicine by the physicians with whom
it contracts. Accordingly, the Company believes that it is not in violation of
applicable state laws relating to the practice of medicine. The laws in most
states regarding the corporate practice of medicine have been subjected to
limited judicial and regulatory interpretation and, therefore, no assurances
can be given that the Company's activities will be found to be in compliance,
if challenged. In addition to prohibiting the practice of medicine, numerous
states prohibit entities like the Company from engaging in certain transactions
such as fee-splitting, with physicians.
State and federal statutes impose substantial penalties, including civil
and criminal fines and imprisonment, on health care providers that fraudulently
or wrongfully bill governmental or other third party payors for health care
services. The federal law prohibiting false billings allows a private person to
bring a civil action in the name of the United States government for violations
of its provisions. The Company believes it is in material compliance with such
laws, but there can be no assurances that the Company's activities will not be
challenged or scrutinized by governmental authorities. Moreover, technical
Medicare and other reimbursement rules affect the structure of physician
billing arrangements. The Company believes it is in material compliance with
such regulations, but upon review, regulatory authorities could conclude
otherwise, and in such event, the Company may have to modify its relationship
with its affiliated physician groups. Noncompliance with such regulations may
adversely affect the operation of the Company and subject it and such physician
groups to penalties and additional costs.
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-kickback Amendments," prohibit the offer, payment, solicitation or
receipt of any form of remuneration either in return for the referral of
Medicare or state health program patients or patient care opportunities, or in
return for the recommendation, arrangement, purchase, lease or order of items
or services that are covered by Medicare or state health programs. The
Anti-kickback Amendments are broad in scope and have been broadly interpreted
by courts in many jurisdictions. Read literally, the statute places at risk
many otherwise legitimate business arrangements, potentially subjecting such
arrangements to lengthy, expensive investigations and prosecutions initiated by
federal and state governmental officials. In particular, the Office of the
Inspector General of the U.S. Department of Health and Human Services has
expressed concern that the acquisition of physician practices by entities in a
position to receive referrals from such physicians in conjunction with the
physicians' continued practice in affiliation with the purchaser could violate
the Anti-kickback Amendments.
In July 1991, in part to address concerns regarding the Anti-kickback
Amendments, the federal government published regulations that provide
exceptions, or "safe harbors," for certain transactions that will be deemed not
to violate the Anti-kickback Amendments. Among the safe harbors included in the
regulations were provisions relating to the sale of physician practices,
management and personal services agreements, and employee relationships.
Additional safe harbors were published in September 1993 offering protections
under the Anti-kickback Amendments to eight new activities, including referrals
within group practices consisting of active investors. Proposed amendments to
clarify these safe harbors were published in July 1994 which, if adopted, would
cause substantive retroactive changes to the 1991 regulations. Although the
Company believes that it is not in violation of the Anti-kickback Amendments,
some of its operations do not fit within any of the existing or proposed safe
harbors.
The Company believes that, although it is receiving remuneration under
management services agreements, it is not in a position to make or influence
the referral of patients or services reimbursed under government programs to
the physician groups, and therefore, believes it has not violated the
Anti-kickback Amendments. In certain states,
30
<PAGE>
the Company is a separate provider of Medicare or state health program
reimbursed services. To the extent the Company is deemed by state or federal
authorities to be either a referral source or a separate provider under its
management services agreements and to receive referrals from physicians, the
financial arrangement under these agreements could be subject to scrutiny under
the Anti-kickback Amendments. Violation of the Anti-kickback Amendments is a
felony, punishable by fines up to $25,000 per violation and imprisonment for up
to five years. In addition, the Department of Health and Human Services may
impose civil penalties excluding violators from participation in Medicare or
state health programs.
Significant limitations on physician referrals were enacted, subject to
certain exemptions, by Congress in the Omnibus Budget Reconciliation Act of
1993. These prohibitions, commonly known as "Stark II," amended prior physician
self-referral legislation known as "Stark I" by dramatically enlarging the
field of physician-owned or physician-interested entities to which the referral
prohibitions apply. Effective January 1, 1995 and subject to certain
exemptions, Stark II prohibits a physician or a member of his immediate family
from referring Medicare or Medicaid patients to an entity providing "designated
health services" in which the physician has an ownership or investment
interest, or with which the physician has entered into a compensation
arrangement including the physician's own group practice. The designated health
services include the provision of radiology and other diagnostic services,
radiation therapy services, physical and occupational therapy services, durable
medical equipment, parenteral and enteral nutrients, certain equipment and
supplies, prosthetics, orthotics, outpatient prescription drugs, home health
services and inpatient and outpatient hospital services. The penalties for
violating Stark II include a prohibition on Medicaid and Medicare reimbursement
and civil penalties of as much as $15,000 for each violative referral and
$100,000 for participation in a "circumvention scheme." A physician's ownership
of publicly traded securities of a corporation with equity exceeding $75
million as of the end of its most recent fiscal year is not deemed to
constitute an ownership or investment interest in that corporation under Stark
II. The Company was not eligible for this exemption as of its fiscal year
ending December 31, 1995. In 1996, after completion of the initial public
offering, the Company changed its fiscal year end to January 31. The Company
believes that it presently satisfies the Stark II stockholders' equity
exception and that its compensation arrangements satisfy other applicable
exceptions in Stark II.
The Company believes that its activities are not in violation of Stark I
or Stark II; however, the Stark legislation is broad and ambiguous.
Interpretative regulations clarifying the provisions of Stark I were issued on
August 14, 1995 and Stark II regulations have yet to be proposed. While the
Company believes it is in compliance with the Stark legislation, future
regulations could require the Company to modify the form of its relationships
with the affiliated physician groups. Moreover, the violation of Stark I or II
by the Company's affiliated physician groups could result in significant fines
and loss of reimbursement which would adversely affect the Company. The Anti-
kickback and Stark laws prevent the Company from requiring referrals from
affiliated physician groups.
Many states have adopted similar prohibitions against payment intended to
induce referrals of Medicaid and other third party payor patients. The State of
Florida, for instance, enacted a Patient Self-Referral Act in April 1992 that
severely restricts patient referrals for certain services, prohibits mark-ups
of certain procedures, requires disclosure of ownership in a business to which
patients are referred and places other regulations on health care providers.
The Company believes it is likely that other states will adopt similar
legislation. Accordingly, expansion of the operations of the Company to certain
jurisdictions may require it to comply with such jurisdictions' regulations
which could lead to structural and organizational modifications of the
Company's form of relationships with physician groups. Such changes, if any,
could have an adverse effect on the Company.
The Company has adopted a formal compliance program designed to prevent
violations of Stark II and the Anti-kickback Amendments in both its
acquisitions and day to day operations. The Company has hired a full-time
compliance officer to implement and monitor the compliance program.
Laws in all states regulate the business of insurance and the operation of
HMOs. Many states also regulate the establishment and operation of networks of
health care providers. While these laws do not generally apply to the hiring and
contracting of physicians by other health care providers, there can be no
assurance that regulatory authorities of the states in which the Company
operates would not apply these laws to require licensure of the Company's
operations as an insurer, as an HMO or as a provider network. The Company
believes that it is in compliance with these laws in the states in which it does
business, but there can be no assurance that future interpretations of insurance
and health care network laws by regulatory authorities in these states or in the
states into which the Company may expand will not require licensure or a
restructuring of some or all of the Company's operations.
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<PAGE>
Reimbursement and Cost Containment
Approximately 34% of the revenue of the Company is derived from payments
made by government sponsored health care programs (principally, Medicare and
Medicaid). As a result, any change in reimbursement regulations, policies,
practices, interpretations or statutes could adversely affect the operations of
the Company. The U.S. Congress has passed a fiscal year 1996 budget resolution
that calls for reductions in the rate of spending increases over the next seven
years of $270 billion in the Medicare program and $182 billion in the Medicaid
program. Through the Medicare program, the federal government has implemented a
resource-based relative value scale ("RBRVS") payment methodology for physician
services. RBRVS is a fee schedule that, except for certain geographical and
other adjustments, pays similarly situated physicians the same amount for the
same services. The RBRVS is adjusted each year and is subject to increases or
decreases at the discretion of Congress. The implementation of RBRVS may result
in reductions in payment rates for procedures provided by physicians under
current contract with the Company. RBRVS-type payment systems have also been
adopted by certain private third party payors and may become a predominant
payment methodology. A broader implementation of such programs would reduce
payments by private third party payors and could indirectly reduce the
Company's operating margins to the extent that the cost of providing management
services related to such procedures could not be proportionately reduced. To
the extent the Company's costs increase, the Company may not be able to recover
such cost increases from government reimbursement programs. In addition,
because of cost containment measures and market changes in nongovernmental
insurance plans, the Company may not be able to shift cost increases to
nongovernmental payors. The Company expects a reduction from historical levels
in per patient Medicare revenue received by certain of the physician groups
with which the Company contracts; however, the Company does not believe such
reductions would, if implemented, result in a material adverse effect on the
Company.
In addition to current governmental regulation, the Clinton Administration
and several members of Congress have proposed legislation for comprehensive
reforms affecting the payment for and availability of health care services.
Aspects of certain of such health care proposals, such as reductions in
Medicare and Medicaid payments, if adopted, could adversely affect the Company.
Other aspects of such proposals, such as universal health insurance coverage
and coverage of certain previously uncovered services, could have a positive
impact on the Company's business. It is not possible at this time to predict
what, if any, reforms will be adopted by Congress or state legislatures, or
when such reforms would be adopted and implemented. As health care reform
progresses and the regulatory environment accommodates reform, it is likely
that changes in state and federal regulations will necessitate modifications to
the Company's agreements and operations. While the Company believes it will be
able to restructure in accordance with applicable laws and regulations, the
Company cannot assure that such restructuring in all cases will be possible or
profitable.
Insurance
Health care companies, such as the Company, are subject to medical
malpractice, personal injury and other liability claims which are customary
risks inherent in the operation of health care facilities and provision of
health care services. The Company maintains property insurance equal to the
amount management deems necessary to replace the property, and liability and
professional malpractice insurance policies in the amount of $20,000,000
(annual aggregate) and with such coverages and deductibles which are deemed
appropriate by management, based upon historical claims, industry standards and
the nature and risks of its business. The Company provides medical malpractice
insurance for its employee physicians in the amount of $1,000,000 per claim and
$3,000,000 annual aggregate and also requires that non-employee physicians
practicing at its facilities carry medical malpractice insurance to cover their
respective individual professional liabilities. There can be no assurance that
a future claim will not exceed available insurance coverages or that such
coverages will continue to be available for the same scope of coverages at
reasonable premium rates. Any substantial increase in the cost of such
insurance or the unavailability of any such coverages could have a material
adverse effect on the Company's business.
Employees
As of January 31, 1997, the Company employed approximately 1,055 persons,
approximately 920 of whom were full-time employees. The Company believes that
its labor relations are good.
32
<PAGE>
Legal Proceedings
The Company is subject to legal proceedings in the ordinary course of its
business. The Company does not believe that any such legal proceedings will
have a material adverse effect on the Company, although there can be no
assurance to this effect.
A subsidiary of the Company, Oncology Therapies, Inc. ("OTI") (formerly
Radiation Care, Inc., "RCI") is subject to the litigation described below which
relates to events prior to the Company's operation of RCI, and the Company has
agreed to indemnify and defend certain defendants in the litigation who were
former directors and officers of RCI, subject to certain conditions.
In December 1994, prior to its merger with the Company in March 1995, RCI
entered into a settlement agreement with the federal government arising out of
claims under the fraud-and-abuse provisions of the Medicare law. Under the
settlement agreement, RCI, without admitting that it violated the law,
consented to a civil judgment providing for its payment of $2 million to the
federal government and the entry of an injunction against violations of such
provisions.
On February 16, 1995, six former stockholders of RCI filed a consolidated
amended Class Action Complaint in Delaware Chancery Court (In re Radiation
Care, Inc. Shareholders Litigation, Consolidated C.A. No. 13805) against RCI,
Thomas Haire, Gerald King, Charles McKay, Abraham Gosman, Oncology Therapies of
America, Inc. ("OTA") and A.M.A. Financial Corporation, ("AMA") alleging that
the RCI stockholders should have received greater consideration for their RCI
stock when RCI was merged with the Company. Plaintiffs allege breaches of
fiduciary duty by the former RCI directors, as well as aiding and abetting of
such fiduciary duty breaches by Mr. Gosman, OTA and AMA. Plaintiffs seek
compensatory or rescissionary damages of an undisclosed amount on behalf of all
RCI stockholders, together with an award of the costs and attorneys' fees
associated with the action. No class has been certified in this litigation. On
May 17, 1996, the Company filed an Answer denying any liability of any
defendant in connection with this litigation. All discovery in the Delaware
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 which
was heard by the Court on January 29, 1996. 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 now
being prepared.
33
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information as of June 23, 1997
concerning the directors and executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Abraham D. Gosman.......................... 68 Chairman of the Board of Directors and Chief Executive
Officer
Frederick R. Leathers...................... 39 Chief Financial Officer and Treasurer
Francis S. Tidikis......................... 49 Chief Operating Officer
Edward E. Goldman, M.D..................... 52 Executive Vice President of Physician Development
Gregory Gardner............................ 41 Executive Vice President Finance
Alberto M. Hernandez....................... 36 General Counsel
Robert A. Miller........................... 42 Director and President
Eric Moskow................................ 38 Director and Executive Vice President Strategic Planning
Bruce A. Rendina........................... 43 Vice Chairman of the Board of Directors
Hugh L. Carey.............................. 78 Director
Joseph N. Cassese.......................... 67 Director
John T. Chay............................... 39 Director
David M. Livingston, M.D................... 56 Director
Stephen E. Ronai........................... 60 Director
</TABLE>
The following is a biographical summary of the experience of the executive
officers and directors of the Company:
Abraham D. Gosman has served since June 1994 as an executive officer of the
Company and is presently the Chairman of the Board of Directors and Chief
Executive Officer of the Company. Previously, he founded and was the principal
owner of The Mediplex Group, Inc. ("Mediplex"), a diversified health care
company, and its predecessor companies for more than 15 years, with the
exception of the period from April 1986 to August 1990 when Mediplex was owned
by Avon Products, Inc. ("Avon"). He was the Chief Executive Officer of Mediplex
from its inception to September 1988 and assumed that position again after
Mediplex was purchased from Avon in August 1990. In addition, Mr. Gosman has
served as Chairman of the Board of Trustees and Chief Executive Officer of
Meditrust, the nation's largest health care real estate investment trust, since
its inception in 1985. In October 1996, Mr. Gosman became Chairman of the Board
of Trustees of CareMatrix Corporation, an assisted living development and
management company.
Frederick R. Leathers has served since June 1994 as the Chief Financial
Officer and Treasurer of the Company. Previously, he served as Treasurer, Chief
Financial Officer and Principal Accounting Officer of Mediplex from October 1991
to June 1994, Corporate Controller from May 1991 to October 1991 and held the
position of Assistant Controller from May 1986 to May 1987. He was Treasurer of
A.M.A. Advisory Corp. (the advisor to Meditrust) and Controller of Meditrust
from July 1988 to January 1991. Mr. Leathers was associated with State Street
Bank and Trust Company, Inc. in the mutual funds division from May 1987 to July
1988.
Francis S. Tidikis has been the Company's Chief Operating Officer since
November 1996. He also served from January 1996 to March 1996 as the Company's
Executive Vice President of Marketing and from March 1996 to October 1996 as its
Executive Vice President of Operations. Previously, Mr. Tidikis was Senior Vice
President of Physician Management Services for Tenet Healthcare Corporation from
March 1995 to January 1996. Mr. Tidikis had been with Tenet Healthcare
Corporation and its predecessor, National Medical Enterprises, since April 1981,
serving as Executive Vice President of the Eastern District from June 1991 to
February 1995 and as Vice President of Operations for the Eastern Region
Hospital Group from February 1984 to September 1990. Mr. Tidikis currently
serves as a director of Professional Liability Insurance Company.
Edward E. Goldman, M.D. has served since October 1994 as President of a
subsidiary of the Company, since October 1995 as an executive officer of the
Company and is presently Executive Vice President of Physician
34
<PAGE>
Development. Dr. Goldman is a board certified family practice physician and
previously served as Chairman of PAL-MED Health Services from February 1983 to
September 1994, a multi-specialty IPA which provides physicians services and
manages health care related services.
Gregory Gardner has served since November 1996 as Executive Vice President
Finance of the Company. Previously, he served as Senior Vice President,
Financial Operations of Good Samaritan & St. Mary's Medical Centers from August
1995 to November 1996. From November 1990 to December 1993 Mr. Gardner served as
American Medical International, Inc.'s Corporate Director of Finance and from
January 1994 to July 1995 as its Corporate Director of Development.
Alberto M. Hernandez has served as general counsel since July 1996 and as
an executive officer since March 1997. Mr. Hernandez was associated with the
Miami, Florida law firm of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel,
P.A. from March 1991 through June 1996.
Robert A. Miller has been the Company's President and a director of the
Company since March 1997. He also served from June 1994 to February 1997 as the
Company's Executive Vice President of Acquisitions. Previously, he served as
Senior Vice President/Development Operations of Mediplex from September 1992 and
Vice President from June 1991. Mr. Miller served as Regional Operations Director
for New Medico Associates from January 1991 to October 1991. Previously, Mr.
Miller was Vice President of Hospital Operations of Glenbeigh, Inc., where he
was employed from 1979 through 1991.
Eric Moskow, M.D, has served as a director of the Company and has been
Executive Vice President of Strategic Planning of the Company since September
1996. He founded Physician's Choice Management, LLC ("Physician's Choice") in
October 1995 and served as its Executive Vice President from October 1995 to
October 1996. Prior to establishing Physician's Choice, he served as Medical
Director for Mediplex of Ridgefield from November 1994 to August 1996 and as
Associate Medical Director for US Healthcare in Connecticut from 1988 to 1990.
Dr. Moskow is board-certified in internal medicine and has served as President
of the Family Medical Associates of Ridgefield for the past nine years,
Bruce A. Rendina has served as a director of the Company since January 29,
1996 and assumed the role of Vice Chairman of the Board of Directors in March
1997. Mr. Rendina has served since 1994 as President of DASCO, which he
co-founded. Previously, he served as its Executive Vice President from 1987 to
1994.
Hugh L. Carey has served as a director of the Company since February 21,
1996. Currently, he is Chairman of the Board of Advisors of Cambridge Partners,
L.L.C. He served as an Executive Vice President of W.R. Grace & Company from
January 1989 to December 1995. He was Governor of the State of New York from
January 1974 to January 1982. He is currently a director of Triarc Companies,
Inc.
Joseph N. Cassese has served as a director of the Company since January 29,
1996. Mr. Cassese was the Vice President of Mediplex from January 1976 to March
1986 and the President of Mediplex from March 1986 to March 1988 and again from
August 1990 to December 1991. Mr. Cassese was also a Vice President of A.M.A.
Advisory Corp., the advisor to Meditrust, from April 1988 to August 1990. Mr.
Cassese has been retired since December 1991.
John T. Chay has served as a director of the Company since April 15, 1996.
Mr. Chay has served as an executive officer of Nutrichem, Inc. which he
co-founded in November 1993 and has served since June 1991 as Chief Executive
Officer of The HealthLink Group, Inc., a practice management consulting firm
which he also founded.
David M. Livingston, M.D. has served as a director of the Company since
January 29, 1996. Dr. Livingston has been a Director of Dana-Farber Cancer
Institute in Boston, Massachusetts since 1991 and has been employed as a
physician at the Institute since 1973. He currently serves as Chairman of the
Institute's Department of Medicine and Executive Committee for Research and as a
Trustee of the Institute. He is also the Emil Frei Professor of Medicine at
Harvard Medical School where he has taught since 1973.
Stephen E. Ronai has served as a director of the Company since January 29,
1996. Mr. Ronai has been a partner in the Connecticut law firm of Murtha,
Cullina, Richter and Pinney since 1984 where he serves as Chairman of the firm's
Health Care Department. He is a member of the American Academy of Healthcare
Attorneys of the American Hospital Association and the National Health Lawyers
Association. From 1989 to 1995 he served as a
35
<PAGE>
member of the Board of Directors of the National Health Lawyers Association.
He also formerly served as Chairman of the Board of Trustees of the Connecticut
Hospital Association.
The Board of Directors is divided into three classes, with staggered
three-year terms. The terms of Mr. Cassese and Drs. Livingston and Moskow will
expire at the Company's 1997 annual meeting; the terms of Messrs. Gosman, Carey
and Chay at the Company's 1998 annual meeting; and the terms of Messrs. Rendina
and Ronai will expire at the Company's 1999 annual meeting. Successors to the
directors whose terms expire at each annual meeting are eligible for election
for three-year terms. A director holds office until the annual meeting for the
year in which his term expires and until his successor is elected and qualified.
These provisions may make it more difficult for holders of the Common Stock to
remove the directors and officers of the Company than if all directors were
elected on an annual basis.
Officers are appointed by and serve at the discretion of the Board of
Directors. The officers, other than Mr. Gosman, will devote substantially all
of their business time to the business and affairs of the Company.
Executive Committee. The members of the Executive Committee of the
Company's Board of Directors are Messrs. Gosman, Rendina and Cassese. The
Executive Committee exercises all the powers of the Board of Directors between
meetings of the Board of Directors, except such powers as are reserved to the
Board of Directors by law.
Audit and Compliance Committee. The members of the Audit and Compliance
Committee of the Company's Board of Directors are Messrs. Carey and Ronai and
Dr. Livingston. The Audit and Compliance Committee makes recommendations
concerning the engagement of independent public accountants, reviews with the
independent public accountants the plans for and results of the audit, approves
professional services provided by the independent public accountants, reviews
the independence of the independent public accountants, considers the range of
audit and non-audit fees and reviews the adequacy of the Company's internal
accounting controls. The Audit and Compliance Committee also oversees the
Company's Compliance Program and the implementation and adherence to the
Company's Standards of Conduct, both of which are designed to ensure
maintenance of high ethical standards and compliance with all legal
(health-care related and other) requirements applicable to the Company.
Compensation Committee. The members of the Compensation Committee of the
Company's Board of Directors are Messrs. Cassese and Carey. The Compensation
Committee establishes a general compensation policy for the Company and
approves increases both in directors' fees and in salaries paid to officers and
senior employees of the Company. The Compensation Committee administers all of
the Company's employee benefit plans including the 1995 Equity Incentive Plan.
The Compensation Committee determines, subject to the provisions of the
Company's plans, the directors, officers, employees and consultants of the
Company eligible to participate in any of the plans, the extent of such
participation and terms and conditions under which benefits may be vested,
received or exercised.
Compensation of Directors
Officers who are members of the Board of Directors do not receive
compensation for serving on the Board. Each other member of the Board receives
annual compensation of $15,000 for serving on the Board, plus a fee of $1,000
for each Board of Directors' meeting attended. In addition, such directors
receive an additional fee of $500 for each committee meeting attended, except
that only one fee will be paid in the event that more than one such meeting is
held on a single day. All directors receive reimbursement of reasonable
expenses incurred in attending Board and committee meetings and otherwise
carrying out their duties. Each non-employee director who was a member of the
Compensation Committee at the time of the closing of the Initial Public
Offering received options to purchase 10,000 shares of Common Stock at the
offering price pursuant to the Equity Plan. Each director who is a member of
the Compensation Committee on the first business day following each annual
meeting of the shareholders will receive the option to purchase 2,500 shares of
Common Stock. Any of such options granted to a member of the Compensation
Committee under the Equity Plan will be exercisable one year following the date
of grant.
Executive Compensation
The following table sets forth certain information regarding compensation
paid or accrued by the Company during the period June 24, 1994 (inception) to
December 31, 1994, the year ended December 31, 1995 and the fiscal year ended
January 31, 1997, to the Company's Chief Executive Officer and to five other
executive officers of the Company (the "Named Executive Officers").
36
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Awards All Other
Compensation Securities Underlying Compensation(2)
Name and Principal Position Year(1) Salary ($) Options (#) ($)
- --------------------------------------------------- --------- -------------- ----------------------- ----------------
<S> <C> <C> <C> <C>
Abraham D. Gosman ................................. 1997 225,000 -- --
Chairman and Chief Executive Officer 1995 225,000 -- --
1994 116,682 --
Donald A. Sands (3)(4) ........................... 1997 462,026 -- 87,015
Vice President - Medical Facility Development --
Bruce A. Rendina (3) ........................... 1997 435,782 -- 53,948
President of DASCO Development Corporation --
Edward E. Goldman, M.D ........................... 1997 398,473 -- --
Executive Vice President of Physician Development 1995 400,000 -- --
1994 133,333 --
William A. Sanger (5) ............................. 1997 304,976 -- --
Executive Vice President 1995 304,571 -- 174
1994 98,038 --
Francis S. Tidikis (3) ........................... 1997 275,156 150,000 (6) --
Chief Operating Officer
</TABLE>
- ----------------
(1) In January 1996, the Company changed its fiscal year end from December 31
to January 31.
(2) Amounts indicated are for life insurance premiums paid by the Company.
(3) Messrs. Sands, Rendina and Tidikis became executive officers of the Company
in January 1996.
(4) Mr. Sands' employment with the Company terminated in January 1997.
(5) Mr. Sanger's employment with the Company terminated in June 1997.
(6) Represents options granted to Mr. Tidikis on January 23, 1996.
Option Grants in Last Fiscal Year
The following table sets forth certain information regarding options
granted during the fiscal year ended January 31, 1997 by the Company to each of
the Named Executive Officers:
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Rates of
Stock Price
Appreciation
for Option
Individuals Grants Term (A)
- --------------------------------------------------------------------------------- -----------------------------------
% of Total
Number of Options
Securities Granted to Exercise
Underlying Employees or
Options in Fiscal Base Expiration
Name Granted (#) Year Price ($/Sh) Date 5% ($) 10% ($)
- --------------------------- ------------- ------------ -------------- ----------- ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Abraham D. Gosman ...... -- --% $ -- -- $ -- $ --
Donald A. Sands ......... -- -- -- -- -- --
Bruce A. Rendina ......... -- -- -- -- -- --
Edward E. Goldman ...... -- -- -- -- -- --
William A. Sanger ...... -- -- -- -- -- --
Francis S. Tidikis ...... 100,000 6.1 15.00 1/23/06 1,636,000 3,493,000
10,000 * 18.375 1/23/06 129,850 315,550
40,000 2.5 (B) 1/23/06 674,400(C) 1,417,200(C)
</TABLE>
- ------------
*Less than 1%.
(A) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of 5% and 10% compounded
annually from the date the respective options were granted to their
expiration date. Actual gains, if any, on stock option exercises will
depend on the future performance of the Common Stock and the date on which
the options are exercised. The Company has not granted stock appreciation
rights to date.
37
<PAGE>
(B) Fair market value on the date such options become exercisable.
(C) Assuming an exercise price of $14.50 (the closing price of the Common Stock
on The Nasdaq National Market on May 9, 1997).
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values.
The Named Executive Officers did not exercise any options during the
fiscal year ended January 31, 1997. As of such date, Mr. Tidikis held options
to purchase 150,000 shares of the Common Stock, 30,000 shares of which were
exercisable. None of the other Named Executive Officers held options as of such
date. The value of the exercisable portion of Mr. Tidikis' options was $17,500
and the value of the unexercisable portion of his options was $70,000. Value is
calculated on the basis of the difference between the option exercise price and
$15.875, the closing price for the Common Stock on The Nasdaq National Market
on January 31, 1997, multiplied by the number of shares of the Common Stock
underlying the option. No value is determinable with respect Mr. Tidikis'
option to purchase 40,000 shares of the Common Stock which is unexercisable and
which will have its exercise price determined on the date that it becomes
exercisable.
Employment Agreements
The Company has entered into an employment agreement with Mr. Rendina that
provides for an initial one year term automatically renewable for successive
one year periods until either party elects not to renew. The base salary for
Mr. Rendina under the agreement is $330,000 per year. In addition, he is
entitled to receive bonuses and benefits, including life, accident, health and
dental insurance. The agreement may be terminated by the Company without cause
upon 90 days notice and with cause effective immediately upon notice. The
agreement may be terminated by Mr. Rendina immediately upon notice.
The Company has entered into an employment agreement with Dr. Goldman that
provides for an initial three year term automatically renewable for an initial
period of two years and for successive periods of one year thereafter, unless
either party elects not to renew. The base salary for Dr. Goldman under the
agreement is $400,000 per year. In addition, he is entitled to receive bonuses
and benefits, including health insurance, dental insurance, short and long term
disability, life insurance and a car allowance. The agreement may be terminated
by the Company without cause upon 30 days notice (180 days notice after the
first anniversary of the agreement) and with cause (as defined in the
agreement) effective immediately upon notice. Dr. Goldman may terminate the
agreement immediately if the Company fails to fulfill its obligations
thereunder or without cause upon 30 days notice. In the event that Dr. Goldman
is terminated without cause, he is entitled to receive his base salary for the
lesser of (i) the remaining term of the then current employment period or (ii)
12 months following the effective date of his termination of employment. The
agreement contains restrictive covenants prohibiting Dr. Goldman from competing
with the Company, or soliciting employees of the Company to leave, during his
employment and for a period of two years after termination of the agreement,
other than after a termination by the Company without cause or by Dr. Goldman
for good reason.
1995 Equity Incentive Plan
The Company maintains the 1995 Equity Incentive Plan (the "Equity Plan"),
which provides for the award ("Award") of up to three million shares of Common
Stock in the form of incentive stock options ("ISOs"), non-qualified stock
options ("Non-Qualified Stock Options"), bonus stock, restricted stock,
performance stock units and stock appreciation rights. All employees, directors
and consultants of the Company and any of its subsidiaries are eligible to
participate in the Equity Plan, except directors who are members of the
Compensation Committee (the "Committee"). In addition, certain directors are
eligible for non-discretionary grants under the Equity Plan.
The Equity Plan is administered by the Committee, which determines who
shall receive Awards from those employees and directors who are eligible to
participate in the Equity Plan, the type of Award to be made, the number of
shares of Common Stock which may be acquired pursuant to the Award and the
specific terms and conditions of each Award, including the purchase price,
term, vesting schedule, restrictions on transfer and any other conditions and
limitations applicable to the Awards or their exercise. The purchase price per
share of Common Stock cannot be less than 100% of the fair market value of the
Common Stock on the date of grant with respect to ISOs and not less than 50% of
the fair market value of the Common Stock on the date of grant with respect to
Non-Qualified
38
<PAGE>
Options. ISOs cannot be exercisable more than ten years following the date of
grant and Non-Qualified Stock Options cannot be exercisable more than ten years
and one day following the date of grant. The Committee may at any time
accelerate the exercisability of all or any portion of any option.
Each Award may be made alone, in addition to or in relation to any other
Award. The terms of each Award need not be identical, and the Committee need
not treat participants uniformly. Except as otherwise provided by the Equity
Plan or a particular Award, any determination with respect to an Award may be
made by the Committee at the time of award or at any time thereafter. The
Committee determines whether Awards are settled in whole or in part in cash,
Common Stock, other securities of the Company, Awards or other property. The
Committee may permit a participant to defer all or any portion of a payment
under the Equity Plan, including the crediting of interest on deferred amounts
denominated in Common Stock. Such a deferral may have no effect for purposes of
determining the timing of taxation of payments. In the event of certain
corporate events, including a merger, consolidation, dissolution, liquidation
or the sale of substantially all of the Company's assets, all Awards become
fully exercisable and realizable.
The Committee may amend, modify or terminate any outstanding Award,
including substituting therefor another Award of the same or a different type,
changing the date of exercise or realization, and converting an ISO to a
Non-Qualified Stock Option, if the participant consents to such action, or if
the Committee determines that the action would not materially and adversely
affect the participant. Awards may not be made under the Equity Plan after
November 14, 2005, but outstanding Awards may extend beyond such date.
The number of shares of Common Stock issuable pursuant to the Equity Plan
may not be changed except by approval of the stockholders. However, in the
event that the Committee determines that any stock dividend, extraordinary cash
dividend, creation of a class of equity securities, recapitalization,
reorganization, merger, consolidation, split-up, spin-off, combination,
exchange of shares, warrants or rights offering to purchase Common Stock at a
price substantially below fair market value, or other similar transaction
affects the Common Stock such that an adjustment is required to preserve the
benefits intended to be made available under the Equity Plan, the Committee may
adjust equitably the number and kind of shares of stock or securities in
respect of which Awards may be made under the Equity Plan, the number and kind
of shares subject to outstanding Awards, and the award, exercise or conversion
price with respect to any of the foregoing, and if considered appropriate, the
Committee may make provision for a cash payment with respect to an outstanding
Award. In addition, upon the adoption of a plan or agreement concerning a
change in control, sale of substantially all the assets, or liquidation or
dissolution of the Company, all Awards which are not then fully exercisable or
realizable become so. Common Stock subject to Awards which expire or are
terminated prior to exercise or Common Stock which has been forfeited under the
Equity Plan will be available for future Awards under the Equity Plan. Both
treasury shares and authorized but unissued shares may be used to satisfy
Awards under the Equity Plan.
The Equity Plan may be amended from time to time by the Board of Directors
or terminated in its entirety; however, no amendment may be made without
stockholder approval if such approval is necessary to comply with any
applicable tax or regulatory requirement, including any requirement for
stockholder approval under Section 16(b) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or any successor provision.
39
<PAGE>
CERTAIN TRANSACTIONS
During 1994 and 1995, the Related Companies and Mr. Gosman completed the
acquisition of various companies and businesses which were transferred to the
Company in connection with the Formation. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Acquisition Summary"
for a description of the Acquisitions.
At December 31, 1995 the Company had a $19.5 million loan from NationsBank,
which was guaranteed by Mr. Gosman. Mr. Gosman did not receive any consideration
for this or any other guarantee he has provided on behalf of the Company. The
$19.5 million loan was repaid from the net proceeds of the initial public
offering. After repayments to Mr. Gosman made from the net proceeds of the
initial public offering totalling $28.7 million, the Company owed Mr. Gosman
approximately $10.8 million, which was repaid from the net proceeds of the Debt
Offering. All amounts loaned to the Company by Mr. Gosman accrue interest at a
floating rate equal to NationsBank's prime rate. The Company agreed to repay in
full the amount owed to Mr. Gosman from the proceeds of any public offering by
the Company of its debt or equity securities; and to repay Mr. Gosman from the
proceeds of any institutional debt financing by the Company for working capital
purposes, except that the amount to be repaid from such institutional debt
financing proceeds would not exceed 25% of the maximum amount available to be
borrowed under the terms of the financing. Pursuant to such agreement, the $11.7
million the Company owed Mr. Gosman (including additional amounts borrowed since
the closing of the initial public offering) was repaid from the net proceeds of
the Debt Offering.
In connection with the acquisition of OTI in March 1995, Mr. Gosman
guaranteed until the later of the satisfaction of certain financial covenants
or July 31, 1998 the repayment by a subsidiary of the Company of a portion of
the $17.5 million in acquisition financing from FINOVA Capital Corporation
("FINOVA"). Mr. Gosman's liability under the guarantee was limited to no more
than $6.1 million. The Company used the net proceeds of the initial public
offering to repay in full its obligations to FINOVA.
During 1995, in addition to the guarantee discussed above, Mr. Gosman
guaranteed the payment by the Company of indebtedness in the amount of $4.6
million incurred in connection with the acquisition of DASCO, all of which was
repaid during 1996. In addition, Mr. Gosman executed a reimbursement agreement
and provided collateral for a letter of credit to secure other indebtedness of
the Company in the amount of $5.4 million incurred in connection with the
acquisition of Oncology & Radiation Associates, P.A. Upon the closing of the
initial public offering, the Company obtained the release of Mr. Gosman from
these guarantees and from his other obligations with respect to acquisition
indebtedness through the assumption by the Company of Mr. Gosman's obligation to
pay such Acquisition indebtedness and of the obligation to provide cash
collateral for the letter of credit.
The Company occupies office space for its principal offices in West Palm
Beach, Florida under the terms of a lease which the Company assumed from a
company the stockholders and executive officers of which include Messrs. Gosman,
Leathers and Miller and Dr. Goldman. The Company estimates that the total amount
of lease payments to be made under the assumed lease through the end of the
current lease term will equal approximately $900,000.
In connection with the Formation, the following executive officers and
directors of the Company received the indicated number of shares of Common Stock
in exchange for their shares of common stock of the Related Companies: Mr.
Gosman (including shares held for the benefit of his two adult sons), 8,282,305;
Mr. Rendina, 916,667; Mr. Chay, 133,333; Mr. Leathers, 459,505; Mr. Miller,
459,505; and Dr. Goldman, 168,112.
Various persons who upon the closing of the initial public offering and
the Formation became employees and/or officers of the Company were employees
and/or officers of companies the stockholders and executive officers of which
included Mr. Gosman and Mr. Leathers. The services of such employees and/or
officers were provided to the Company at cost prior to the Formation under the
terms of a management agreement.
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.
Rendina has obtained equity interests in the entities which own 28 of the 32
facilities developed by DASCO. The interests of Mr. 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 and Edward E. Goldman have obtained
limited partnership interests ranging from 7% to 36% in the entities which own
12 facilities
40
<PAGE>
being developed by the Company through DASCO. During the three months ended
April 30, 1997 DASCO recorded revenues in the amount of approximately $1.8
million 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 three months ended April 30, 1997, the Company recorded
revenues in the amount of approximately $3.3 million 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.
Meditrust, a publicly traded real estate investment trust with assets in
excess of $2.4 billion dollars of which Mr. Gosman is the Chairman of the Board
and Chief Executive Officer, has provided financing in the aggregate amount of
$180.5 million for the development of 20 facilities developed by DASCO.
Mr. Ronai is a partner in the Connecticut law firm of Murtha, Cullina,
Richter and Pinney which has been retained to perform certain legal services
for the Company.
During December 1995, the Company obtained a 43.75% interest in Physicians
Choice Management, LLC, a newly formed management services organization that
provides management services to an independent physician association composed
400 physicians based in Connecticut ("Physician's Choice"). The Company acquired
this interest in exchange for a payment of $1.5 million to the stockholders of
Physician's Choice, including Dr. Moskow. During September 1996, the Company
acquired the remaining 56.25% interest from such stockholders for a payment of
$1 million in cash plus 363,442 shares of the Company's Common Stock.
As of April 30, 1997 the Company loaned the shareholders of Physician's
Choice, including Dr. Moskow, an aggregate of $2.7 million to pay the tax
liability related to the sale of Physician's Choice. The loans are secured by a
pledge of the Common Stock held by the former shareholders of Physician's
Choice.
The Company leases space on behalf of its affiliated physicians from a
related entity. Mr. Gosman owns a limited partnership interest in the limited
partnership which is general partner of the limited partnership which owns the
medical mall. The aggregate base rent under such leases is approximately
$537,000.
During November 1994, the Company acquired Nutrichem. In connection with
the acquisition, the Company was required to make contingent note payments of
$4.4 million to the stockholders of Nutrichem, including Mr. Chay. The Company
paid in full the contingent note with the proceeds of the initial public
offering.
In connection with an acquisition, the Company was required to assume an
unfavorable lease which was assigned in January 1997 to an entity principally
owned by Mr. Gosman. The difference between the cost and value of the lease is
approximately $559,000.
41
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of June 23, 1997, certain information
regarding the beneficial ownership of shares of Common Stock by each person
known by the Company to be the beneficial owner of more than 5% of outstanding
Common Stock, by each director and each of the Named Executive Officers of the
Company and by all directors and executive officers as a group. Except as
indicated in the footnotes, all of such shares of Common Stock set forth in the
following table are owned directly, and the indicated person has sole voting and
investment power with respect to all Common Stock shown as beneficially owned by
such person:
<TABLE>
<CAPTION>
Amount of Beneficial
Ownership
--------------------------
Shares
Beneficially Percentage
Name Owned Owned
- ------------------------------------------------------------------------ -------------- -----------
<S> <C> <C>
Abraham D. Gosman (1) ................................................ 8,487,126 36.0%
Putnam Investments, Inc. (2) .......................................... 2,322,300 9.8
Donald A. Sands ...................................................... 892,499 3.8
Bruce A. Rendina ...................................................... 900,001 3.8
Edward E. Goldman, M.D ................................................ 168,112 *
William A. Sanger ..................................................... 336,224 1.4
Francis S. Tidikis (3) ................................................ 31,085 *
Hugh L. Carey ......................................................... -- *
Joseph N. Cassese (4) ................................................ 30,000 *
John T. Chay ......................................................... 142,833 *
David M. Livingston, M.D ............................................. -- *
Eric Moskow (5) ...................................................... 175,252 *
Stephen E. Ronai (6) ................................................ 14,000 *
All directors and executive officers as a group (13 persons) (7) ...... 11,787,068 50.0
</TABLE>
- ----------
* Less than one percent.
(1) Includes 4,000,000 shares held by Mr. Gosman as trustee for the benefit of
his two adult sons. Mr. Gosman's business address is PhyMatrix Corp., 777
South Flagler Drive, West Palm Beach, FL 33401.
(2) Putnam Investments, Inc. ("PIT") and its wholly-owned subsidiary Putnam
Investment Management, Inc. ("PIM") have shared dispositive power with
respect to such shares, including 1,096,700 shares with respect to which
Putnam New Opportunities Fund (the "Fund") has shared voting and
dispositive power. The address of PIT, PIM and the Fund is One Post Office
Square, Boston, Massachusetts 02109. The foregoing is based upon the
Schedule 13G dated July 10, 1996 filed by PIT, PIM and the Fund.
(3) Includes 85 shares owned by Mr. Tidikis' wife with respect to which Mr.
Tidikis disclaims beneficial ownership and 30,000 shares which Mr. Tidikis
has the right to acquire beneficial ownership of upon exercise of an
option.
(4) Includes 10,000 shares which Mr. Cassese has the right to acquire
beneficial ownership of upon exercise of an option.
(5) Includes 100,000 shares which Dr. Moskow has the right to acquire
beneficial ownership of upon exercise of an option.
(6) Includes 10,000 shares which Mr. Ronai has the right to acquire beneficial
ownership of upon exercise of an option.
(7) Includes 175,000 shares which the directors and executive officers have the
right to acquire beneficial ownership of upon exercise of an option.
42
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 41,000,000 shares
of capital stock, which includes 40,000,000 shares of Common Stock and
1,000,000 shares of preferred stock ("Preferred Stock").
Common Stock
Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be submitted to a vote of the stockholders, and such
holders do not have cumulative voting rights. Subject to preferences that may
be applicable to any outstanding shares of Preferred Stock, holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors of the Company out of
funds legally available therefor. See "Dividend Policy." All outstanding shares
of Common Stock are, and the shares to be sold in the offering when issued and
paid for will be, fully paid and nonassessable and the holders thereof will
have no preferences or conversion, exchange or pre-emptive rights. In the event
of any liquidation, dissolution or winding-up of the affairs of the Company,
holders of Common Stock will be entitled to share ratably in the assets of the
Company remaining after payment or provision for payment of all of the
Company's debts and obligations and liquidation payments to holders of
outstanding shares of Preferred Stock, if any.
Preferred Stock
The Preferred Stock, if issued, would have priority over the Common Stock
with respect to dividends and to other distributions, including the
distribution of assets upon liquidation. The Preferred Stock may be issued in
one or more series without further stockholder authorization, and the Board of
Directors is authorized to fix and determine the terms, limitations and
relative rights and preferences of the Preferred Stock, to establish series of
Preferred Stock and to fix and determine the variations as among series. The
Preferred Stock, if issued, may be subject to repurchase or redemption by the
Company. The Board of Directors, without approval of the holders of the Common
Stock, can issue Preferred Stock with voting and conversion rights (including
multiple voting rights) which could adversely affect the rights of holders of
Common Stock. In addition to having a preference with respect to dividends or
liquidation proceeds, the Preferred Stock, if issued, may be entitled to the
allocation of capital gains from the sale of the Company's assets. Although the
Company has no present plans to issue any shares of Preferred Stock following
the closing of the offering, the issuance of shares of Preferred Stock, or the
issuance of rights to purchase such shares, may have the effect of delaying,
deferring or preventing a change in control of the Company or an unsolicited
acquisition proposal.
Classified Board of Directors
The Charter and By-laws of the Company provide for the Board of Directors
to be divided into three classes of directors, as nearly equal in number as is
reasonably possible, serving staggered terms so that directors' terms will
expire either at the 1997, 1998 or 1999 annual meeting of the stockholders.
Starting with the 1996 annual meeting of the stockholders, one class of
directors will be elected each year for a three-year term. See "Management."
The Company believes that a classified Board of Directors will help to
assure the continuity and stability of the Board of Directors and the Company's
business strategies and policies as determined by the Board of Directors, since
a majority of the directors at any given time will have had prior experience as
directors of the Company. The Company believes that this, in turn, will permit
the Board of Directors to more effectively represent the interests of its
stockholders.
With a classified Board of Directors, at least two annual meetings of
stockholders, instead of one, generally will be required to effect a change in
the majority of the Board of Directors. As a result, a provision relating to a
classified Board of Directors may discourage proxy contests for the election of
directors or purchases of a substantial block of the Common Stock because such
a provision could operate to prevent a rapid change in control of the Board of
Directors. The classification provision also could have the effect of
discouraging a third party from making a tender offer or otherwise attempting
to obtain control of the Company. Under the Certificate of Incorporation, a
director of the Company may be removed only for cause by a vote of the holders
of at least 75% of the outstanding shares of the capital stock of the Company
entitled to vote in the election of directors.
43
<PAGE>
Advance Notice Provisions for Stockholder Proposals and Stockholder Nominations
of Directors
The By-laws establish an advance notice procedure with regard to the
nomination by the stockholders of the Company of candidates for election as
directors (the "Nomination Procedure") and with regard to other matters to be
brought by stockholders before a meeting of stockholders of the Company (the
"Business Procedure").
The Nomination Procedure requires that a stockholder give written notice
to the Secretary of the Company, delivered to or mailed and received at the
principal executive officers of the corporation not less than 60 days nor more
than 90 days prior to the meeting, in proper form, of a planned nomination for
the Board of Directors. Detailed requirements as to the form and timing of that
notice are specified in the By-laws. If the Chairman of the Board of Directors
determines that a person was not nominated in accordance with the Nomination
Procedure, such person will not be eligible for election as a director.
Under the Business Procedure, a stockholder seeking to have any business
conducted at an annual meeting must give written notice to the Secretary of the
Company, delivered to or mailed and received at the principal executive
officers of the corporation not less than 60 days nor more than 90 days prior
to the meeting, in proper form. Detailed requirements as to the form and timing
of that notice are specified in the By-laws. If the Chairman of the Board of
Directors determines that such business was not properly brought before such
meeting in accordance with the Business Procedure, such business will not be
conducted at such meeting.
Although the By-laws do not give the Board of Directors any power to
approve or disapprove stockholder nominations for the election of directors or
of any other business desired by stockholders to be conducted at an annual or
any other meeting, the By-laws (i) may have the effect of precluding a
nomination for the election of directors or precluding the conduct of business
at a particular annual meeting if the proper procedures are not followed or
(ii) may discourage or deter a third party from conducting a solicitation of
proxies to elect its own slate of directors or otherwise attempting to obtain
control of the Company, even if the conduct of such solicitation or such
attempt might be beneficial to the Company and its stockholders.
Fair Price Provision for Certain Business Combinations
The Company's Certificate of Incorporation contains a provision which
requires that certain proposed business combinations (the "Business
Combinations") between the Company or any of its subsidiaries, individually,
and an "Interested Stockholder" (as defined below) either must be (i) approved
by the Board of Directors of the Company, provided a majority of "Continuing
Directors" (as defined below) voted in favor of such transaction, or (ii) for a
certain minimum sum, determined by a fixed formula as set forth in the
Company's charter.
An "Interested Stockholder" is defined in the Certificate of Incorporation
as (i) any beneficial owner, either directly or indirectly, of 10% or more of
the voting power of the outstanding voting stock of the Company immediately
prior to a proposed Business Combination, who was not a beneficial owner one
week before the closing of the Company's initial public offering, (ii) an
Affiliate (as defined in the Exchange Act) of the Company who was not an
Affiliate one week before the closing of the Company's initial public offering,
or (iii) an assignee of or a successor in interest to the beneficial ownership
of any shares of capital stock which were within two years prior thereto
beneficially owned by a person under clause (i) hereof, so long as such
assignment or succession shall have occurred in the course of a transaction or
series of transactions not involving a public offering, within the meaning of
the Securities Act, as amended. As a result of the foregoing, Mr. Gosman and
certain other stockholders of the Company prior to the closing of the Company's
initial public offering would not be deemed to be an Interested Stockholders
and would, therefore, not be subject to this provision.
A "Continuing Director" is either (i) a director who is not an Affiliate
or Associate (as defined in the Exchange Act) of an Interested Stockholder and
who was a director of the Company prior to that time when the Interested
Stockholder became an Interested Stockholder, or (ii) a director who is so
designated by a majority of the Continuing Directors then serving on the
Company's Board of Directors.
The Company believes that this provision will ensure that in the event of
a proposal of a certain business combination with an interested party, the
stockholders of the Company will not be coerced into selling their shares or
will receive a fair price in consideration therefor. This provision could make
certain business combinations with particular parties more difficult and could
discourage an Interested Stockholder from contemplating or attempting a
Business Combination with the Company.
44
<PAGE>
Other Provisions
Special Meetings of the Stockholders of the Company. The Company' By-laws
provide that a special meeting of the stockholders of the Company may be called
only by the Chairman of the Board of Directors or by order of the Board of
Directors. This provision prevents stockholders from calling a special meeting
of stockholders and potentially limits the stockholders' ability to offer
proposals to meetings of stockholders, if no special meetings are otherwise
called by the Chairman or the Board or Board of Directors.
Amendment of the By-laws. The Company's Certificate of Incorporation
provides that the By-laws only may be amended only by a vote of the directors
or by a rate of at least 75% of the outstanding shares of the Company's stock
entitled to vote in the election of directors.
No Action by Written Consent. The Company's Certificate of Incorporation
does not permit the Company's stockholders to act by written consent. As a
result, any action to be taken by the Company's stockholders must be taken at a
duly called meeting of the stockholders.
Delaware Takeover Statute
The Company is subject to Section 203 of the DGCL which, with certain
exceptions, prohibits a Delaware corporation from engaging in any of a broad
range of business combinations with any "interested stockholder" for a period
of three years following the date that such stockholder became an interested
stockholder, unless: (i) prior to such date, the Board of Directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (a) by persons who are directors and officers
and (b) by employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer, or (iii) on or after such date, the
business combination is approved by the Board of Directors and authorized at an
annual or special meeting of stockholders by the affirmative vote of at least
66-2/3% of the outstanding voting stock which is not owned by the interested
stockholder. An "interested stockholder" is defined as any person that is (a)
the owner of 15% or more of the outstanding voting stock of the corporation or
(b) an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
Registration Rights
In connection with the Initial Public Offering, the Company issued
13,307,450 shares of Common Stock to certain management and founder
stockholders. In addition, in connection with acquisitions completed through
June 23, 1997, the Company issued or agreed to issue an additional 843,336
shares of restricted stock assuming, with respect to the shares which have yet
to be issued, that the issue price (which is based on the average price of the
Common Stock during the five business days preceeding the issuance) is $15.25,
the closing price of the Common Stock on the NASDAQ National Market on June 23,
1997. All of these shares are "restricted securities" within the meaning of the
Securities Act. Unless the resale of the shares is registered under the
Securities Act, these shares may not be sold in the open market until after the
first anniversary of the date they were acquired and then only in compliance
with the applicable requirements of Rule 144. The Company also has granted
rights to the holders of most of the shares of restricted stock to have their
shares registered under the Securities Act.
In connection with the Debt Offering, the Company filed a registration
statement on Form S-1 with the Commission relating to the resale of
$100,000,000 aggregate principal amount of the Debentures, and the resale of up
to 3,546,099 shares of the Common Stock initially issuable upon conversion of
the Debentures by any holders of the Debentures that did not purchase the
Debentures under the registration statement.
Persons who acquire shares of Common Stock in this offering may
immediately resell such shares in the public market subject, in the case of
affiliates of the business or property that is acquired by PhyMatrix, to
compliance with the restrictions contained in Rule 145 under the Securities
Act.
45
<PAGE>
PLAN OF DISTRIBUTION
This Prospectus related to 5,000,000 shares of Common Stock of the Company
that may be offered and issued by the Company from time to time in connection
with acquisitions of other businesses or properties by the Company.
The Company intends to concentrate its acquisitions in areas related to
the current business of the Company. If the opportunity arises, however, the
Company may attempt to make acquisitions that are either complementary to its
present operations or which it considers advantageous even though they may be
dissimilar to its present activities. The consideration for any such
acquisition may consist of shares of Common Stock, cash, notes or other
evidences of debt, assumptions of liabilities or a combination thereof, as
determined from time to time by negotiations between the Company and the owners
or controlling persons of businesses or properties to be acquired.
The shares covered by this Prospectus may be issued in exchange for shares
of capital stock, partnership interests or other assets representing an
interest, direct or indirect, in other companies or other entities, in exchange
for assets used in or related to the business of such companies or entities, or
otherwise pursuant to the agreements providing for such acquisitions. The terms
of such acquisitions and of the issuance of shares of Common Stock under
acquisition agreements will generally be determined by direct negotiations with
the owners or controlling persons of the businesses or properties to be
acquired or, in the case of entities that are more widely held, through
exchange offers to stockholders or documents soliciting the approval of
statutory mergers, consolidations or sales of assets. It is anticipated that
the shares of Common Stock issued in any such acquisition will be valued at a
price reasonably related to the market value of the Common Stock either at the
time of agreement on the terms of an acquisition or at or about the time of
delivery of the shares.
It is not expected that underwriting discounts or commissions will be paid
by the Company in connection with issuances of shares of Common Stock under
this Prospectus. However, finders' fees or brokers' commissions may be paid
from time to time in connection with specific acquisitions, and such fees may
be paid through the issuance of shares of Common Stock covered by this
Prospectus. Any person receiving such a fee may be deemed to be an underwriter
within the meaning of the Securities Act.
Persons who acquire shares of Common Stock in this offering may
immediately resell such shares in the public market subject, in the case of
affiliates of the business or property that is acquired by PhyMatrix, to
compliance with the restrictions contained in Rule 145 under the Securities
Act.
VALIDITY OF COMMON STOCK
Certain legal matters in connection with the shares of Common Stock being
offered hereby will be passed upon by Nutter, McClennen & Fish, LLP, Boston,
Massachusetts, counsel to the Company.
EXPERTS
The consolidated financial statements of PhyMatrix Corp. for the fiscal
year ended January 31, 1997 and the one month period ended January 31, 1996 and
combined financial statements of PhyMatrix Corp. for the year ended December
31, 1995 and for the period from June 24, 1994 (inception) through December 31,
1994, included in this Prospectus and appearing elsewhere in this Registration
Statement have been audited by Coopers & Lybrand L.L.P., independent
accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the United States Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-4 (together
with all amendments, exhibits and schedules thereto, the "Registration
Statement") under the Securities Act covering the shares of Common Stock. This
Prospectus does not contain all the information set forth in the Registration
Statement, and the exhibits and schedules thereto. For further information,
with respect to the Company and the Common Stock, reference is made to the
Registration Statement, and the exhibits and schedules thereto, which can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices located at Seven World
Trade Center, 13th Floor, New York, New York
46
<PAGE>
10048 and the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. The Commission maintains a web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants that submit electronic filings to the Commission.
Statements made in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete, and reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files periodic reports and other information
with the Commission. For further information with respect to the Company,
reference is hereby made to such reports and other information which can be
inspected and copied at the public reference facilities maintained by the
Commission referenced above.
The Company's Common Stock is listed for trading on Nasdaq under the
trading symbol "PHMX." Reports, proxy statements and other information about
the Company also may be inspected at the offices of Nasdaq Operations, 1735 K
Street, N.W., Washington, D.C. 20006.
47
<PAGE>
PHYMATRIX CORP.
INDEX TO FINANCIAL STATEMENTS
Page
----
PHYMATRIX CORP.
Balance Sheets--April 30, 1997 (unaudited) and
January 31, 1997 (unaudited) F-2
Statements of Operations--three months ended April 30, 1997
(unaudited) and three months ended April 30, 1996 (unaudited) F-3
Statements of Cash Flows--three months ended April 30, 1997
(unaudited) and three months ended April 30, 1996 (unaudited) F-4
Notes to Financial Statements (unaudited) F-5
PHYMATRIX CORP.
Report of Independent Accountants F-8
Balance Sheets as of January 31, 1997, January 31, 1996
and December 31, 1995 F-9
Statements of Operations for the year ended January 31, 1997, the
month ended January 31, 1996, the year ended December 31, 1995
and the period from June 24 (inception) to December 31, 1994 F-10
Statements of Changes in Shareholders' Equity for the year ended
January 31, 1997, the month ended January 31, 1996, the year
ended December 31, 1995 and the period from June 24 (inception)
to December 31, 1994 F-11
Statements of Cash Flows for the year ended January 31, 1997, the
month ended January 31, 1996, the year ended December 31, 1995
and the period from June 24 (inception) to December 31, 1994 F-12
Notes to Financial Statements F-13
F-1
<PAGE>
PART I - FINANCIAL INFORMATION
- -------------------------------------------
Item 1. Financial Statements
PHYMATRIX CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, January 31,
1997 1997
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 73,660,490 $ 79,893,679
Receivables:
Accounts receivable, net 42,010,938 35,846,268
Other receivables 3,139,984 2,318,395
Notes receivable 12,962,126 10,125,000
Prepaid expenses and other current assets 4,891,023 3,680,709
------------ ------------
Total current assets 136,664,561 131,864,051
Property, plant and equipment, net 37,293,554 38,666,523
Notes receivable 7,568,700 4,938,700
Goodwill, net 70,063,915 67,169,274
Management service agreements, net 40,751,613 40,196,102
Investment in affiliates 3,450,955 3,399,859
Other assets (including restricted cash) 11,890,684 11,889,338
------------ ------------
Total assets $307,683,982 $298,123,847
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of debt and capital leases $ 3,652,226 $ 3,745,500
Accounts payable 9,632,044 7,728,234
Accrued compensation 1,085,485 1,480,250
Accrued liabilities 15,596,999 11,444,940
------------ ------------
Total current liabilities 29,966,754 24,398,924
Long-term debt and capital leases, less current portion 6,851,838 7,676,950
Convertible subordinated debentures 100,000,000 100,000,000
Other long term liabilities 14,280,037 14,004,143
Deferred tax liability 199,544 1,354,182
Minority interest 1,819,993 1,798,321
------------ ------------
Total liabilities 153,118,166 149,232,520
Commitments and contingencies
Shareholders' equity:
Common Stock, par value $.01; 40,000,000 shares authorized;
22,666,784 and 22,421,033 shares issued and outstanding
at April 30, 1997 and January 31, 1997, respectively 226,667 224,210
Additional paid in capital 150,431,585 149,329,506
Retained earnings (deficit) 3,907,564 (662,389)
------------ ------------
Total shareholders' equity 154,565,816 148,891,327
------------ ------------
Total liabilities and shareholders' equity $307,683,982 $298,123,847
============ ============
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-2
<PAGE>
PHYMATRIX CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Three
Months Months
Ended Ended
April 30, April 30,
1997 1996
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Net revenue from services $34,494,901 $20,052,278
Net revenue from management service agreements 35,662,955 17,154,816
----------- -----------
Total revenue 70,157,856 37,207,094
Operating costs and administrative expenses:
Cost of affiliated physician management services 16,976,863 8,533,111
Salaries, wages and benefits 16,351,768 11,659,915
Professional fees 1,460,587 901,598
Supplies 8,896,305 5,482,904
Utilities 933,964 584,605
Depreciation and amortization 2,171,871 1,592,711
Rent 3,072,783 1,706,075
Other 13,684,526 2,922,968
----------- -----------
Total operating costs and
administrative expenses 63,548,667 33,383,887
----------- -----------
Interest expense, net 656,467 40,991
Interest expense shareholder - 228,480
Income from investment in affiliates (217,877) (141,947)
----------- -----------
438,590 127,524
----------- -----------
Income before provision for income taxes 6,170,599 3,695,683
Income tax expense 2,244,970 1,404,025
----------- -----------
Net income $ 3,925,629 $ 2,291,658
----------- -----------
Net income per weighted average share $ 0.17 $ 0.11
----------- -----------
Weighted average number of shares outstanding 23,708,982 21,529,950
----------- -----------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-3
<PAGE>
PHYMATRIX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Three
Months Months
Ending Ending
April 30, April 30,
1997 1996
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,925,629 $ 2,291,658
Noncash items included in net income:
Depreciation and amortization 2,171,871 1,592,711
Other (730,922) (15,245)
Changes in receivables (4,957,361) (3,214,260)
Changes in accounts payable and accrued liabilities 3,772,297 (1,141,673)
Changes in other assets (1,940,709) (248,777)
----------- -----------
Net cash provided (used) by operating activities 2,240,805 (735,586)
----------- -----------
Cash flows from investing activities:
Capital expenditures (194,482) (682,709)
Sale of assets 1,490,000 -
Advances under notes receivable (5,467,126) -
Other assets - (84,285)
Acquisitions, net of cash acquired (3,750,688) (2,738,114)
----------- -----------
Net cash used by investing activities (7,922,296) (3,505,108)
----------- -----------
Cash flows from financing activities:
Repayment to shareholder - (3,836,405)
Proceeds from issuance of common stock 38,397 -
Release of cash collateral 480,182 -
Offering costs and other assets (151,891) (929,409)
Repayment of debt (918,386) (2,964,938)
----------- -----------
Net cash used by financing activities (551,698) (7,730,752)
----------- -----------
Decrease in cash and cash equivalents (6,233,189) (11,971,446)
Cash and cash equivalents, beginning of period 79,893,679 46,113,619
----------- -----------
Cash and cash equivalents, end of period $73,660,490 $34,142,173
=========== ===========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-4
<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended April 30, 1997 and 1996 (Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited interim financial statements include the
accounts of PhyMatrix Corp. ("the Company"). These interim financial statements
have been prepared in accordance with generally accepted accounting principles
and the requirements of the Securities and Exchange Commission. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is management's opinion that the accompanying
interim financial statements reflect all adjustments (which are normal and
recurring) necessary for a fair presentation of the results for the interim
periods. These interim financial statements should be read in conjunction with
the audited financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended January 31, 1997. Operating
results for the three months ended April 30, 1997 are not necessarily indicative
of results that may be expected for the year.
2. ACQUISITIONS AND RECENT DEVELOPMENTS
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 has been 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 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.
F-5
<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended April 30, 1997 and 1996 (Unaudited)
During the three months ended April 30, 1997 and 1996, the Company
acquired the assets and/or stock and assumed certain liabilities of various
physician practices and medical support services companies. The transactions had
the following non-cash impact on the balance sheets of the Company as of the
indicated dates:
April 30,
-----------------------------------------
1997 1996
---------------- ----------------
Current assets $1,374,970 $ --
Property, plant and equipment 251,805 693,220
Intangibles 4,510,275 3,038,394
Other noncurrent assets 353,723 --
Current liabilities (974,168) --
Debt -- (643,500)
Noncurrent liabilities -- (350,000)
Equity (1,765,917) --
During March 1997, the Company signed a letter of intent to merge with
Clinical Studies, Ltd. ("CSL"). CSL is one of the largest site management
organizations ("SMOs") in the country. SMOs are management service companies
that organize and manage multisite clinical investigators. CSL owns and operates
19 Phase I-IV research centers and is dedicated to the rapid enrollment of
quality volunteers for investigational drug research in multiple therapeutic
areas such as central nervous system, gerontology, women's health and
endocrinology. The merger is subject to the satisfaction of various conditions,
including the treatment of the merger for accounting purposes as a pooling of
interests.
During April 1997, the Company signed a letter of intent with Beth
Israel Hospital to form an MSO to provide management services to the medical
community in the greater metropolitan New York area. The letter of intent
contemplates that the Company will acquire and manage the physician practice
management operations of Beth Israel Health Care System, which consists of
approximately 130 physicians with more than 20 primary and specialty medical
offices located throughout New York City and Rockland and Westchester counties.
While the Company intends to pursue the consummation of the transactions
described in these letters of intent, there can be no assurance that these
transactions will be consummated.
3. NET INCOME PER SHARE
Net income per common share is based upon the weighted average number
of common shares outstanding (including stock required to be issued in the
future pursuant to acquisition agreements) during the period. For the three
months ended April 30, 1997 and 1996, the weighted average number of common
shares outstanding were 23,708,982 and 21,529,950, respectively. When dilutive,
stock options (less the number of treasury shares assumed to be purchased from
the proceeds) are included in the calculation of the weighted average number of
common shares outstanding. For the three months ended April 30, 1997, conversion
of the 6-3/4% Convertible Subordinated Debentures issued in June 1996, is not
assumed because the effect is anti-dilutive.
F-6
<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended April 30, 1997 and 1996 (Unaudited)
4. RATIO OF EARNINGS TO FIXED CHARGES
For the three months ended April 30, 1997, the ratio of earnings to
fixed charges was 2.94. 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.
5. SUBSEQUENT EVENTS
During June 1997, the Company purchased the assets of and assumed
certain liabilities of two outpatient diagnostic imaging centers located in
Florida. The base purchase price was $12,000,000 payable in shares of Common
Stock of the Company.
F-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of PhyMatrix Corp. (formerly known as Continuum Care
Corporation):
We have audited the consolidated balance sheets of PhyMatrix Corp. (formerly
known as Continuum Care Corporation) as of January 31, 1997 and January 31,1996
and the related consolidated statements of operations, changes in shareholders'
equity and cash flows for the year ended January 31, 1997 and for the one month
period ended January 31, 1996. We have also audited the accompanying combined
balance sheet of PhyMatrix Corp. as of December 31, 1995 and the related
statements of operations, changes in shareholders' equity and cash flows for the
year ended December 31, 1995 and the period from June 24, 1994 (inception) to
December 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of PhyMatrix Corp. as
of January 31, 1997 and January 31, 1996 and the consolidated results of its
operations and its cash flows for the year ended January 31, 1997 and for the
one month period ended January 31, 1996 in conformity with generally accepted
accounting principles. 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 its operations and its cash flows for the year ended December 31,
1995 and the period from June 24, 1994 (inception) to December 31, 1994 in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 13, 1997 except as to the information presented in Note 20,
for which the date is April 24, 1997
F-8
<PAGE>
PHYMATRIX CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
Consolidated Consolidated Combined
------------- ------------- -------------
January 31, January 31, December 31,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ......................................... $ 79,893,679 $ 46,113,619 $ 3,596,913
Receivables:
Accounts receivable, net of allowances of $29,247,122,
$16,565,423 and $13,976,651 at January 31, 1997,
January 31, 1996 and December 31, 1995, respectively....... 35,846,268 21,562,477 20,710,846
Other receivables ............................................ 2,318,395 678,411 569,923
Notes receivable (Note 4) .................................... 10,125,000 -- 516,000
Prepaid expenses and other current assets ........................ 3,680,709 1,202,399 1,276,535
------------- ------------- -------------
Total current assets .............................. 131,864,051 69,556,906 26,670,217
Property, plant and equipment, net (Note 5) .......................... 38,666,523 38,719,086 39,359,328
Notes receivable (Note 4) ............................................ 4,938,700 100,000 170,400
Goodwill, net (Note 2) ............................................... 67,169,274 44,979,865 31,931,453
Management service agreements, net (Note 2) .......................... 40,196,102 15,816,042 16,376,636
Investment in affiliates (Note 6) .................................... 3,399,859 3,256,783 12,925,129
Other assets (including restricted cash) ............................. 11,889,338 7,578,791 4,753,710
------------- ------------- -------------
Total assets ...................................... $ 298,123,847 $ 180,007,473 $ 132,186,873
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of debt and capital leases (Note 8) ............... $ 3,745,500 $ 2,552,306 $ 26,662,510
Current portion of related party debts (Note 8) ................... -- 4,740,588 4,740,588
Due to shareholder - current (Notes 8 and 11) ..................... -- 5,376,000 --
Accounts payable .................................................. 7,728,234 5,333,791 5,353,210
Accrued compensation .............................................. 1,480,250 1,151,268 1,124,316
Accrued and other current liabilities (Note 7) .................... 11,444,940 6,194,108 9,367,532
Accrued interest - shareholder (Note 11) .......................... -- -- 1,708,174
------------- ------------- -------------
Total current liabilities ......................... 24,398,924 25,348,061 48,956,330
Due to shareholder, less current portion (Notes 8 and 11) ........... -- 10,147,287 36,690,180
Long-term debt and capital leases, less current maturities (Note 8) .. 7,676,950 13,653,437 28,847,923
Convertible subordinated debentures .................................. 100,000,000 -- --
Other long term liabilities (Notes 3 and 7) .......................... 14,004,143 2,314,544 2,511,122
Deferred tax liability (Note 14) ..................................... 1,354,182 -- --
Minority interest .................................................... 1,798,321 1,335,167 2,502,970
------------- ------------- -------------
Total liabilities ................................ 149,232,520 52,798,496 119,508,525
Commitments and contingencies (Notes 9 and 10)
Shareholders' equity:
Common Stock, par value $.01; 40,000,000 shares authorized;
22,421,033 and 21,529,950 shares issued and outstanding
at January 31, 1997 and January 31, 1996, respectively......... 224,210 215,300 --
Additional paid in capital ....................................... 149,329,506 140,491,557 25,000,000
Retained earnings (deficit) ...................................... (662,389) (13,497,880) (12,321,652)
------------- ------------- -------------
Total shareholders' equity ....................... 148,891,327 127,208,977 12,678,348
------------- ------------- -------------
Total liabilities and shareholders' equity ....... $ 298,123,847 $ 180,007,473 $ 132,186,873
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-9
<PAGE>
PHYMATRIX CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Consolidated Consolidated Combined Combined
------------ ------------ ------------ ------------
Period From
One June 24
Month Combined (Inception)
Year Ended Ended Year Ended to
January 31, January 31, December 31, December 31,
1997 1996 1995 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues from services .............................. $ 99,773,277 $ 4,636,127 $ 48,360,716 $ 2,446,821
Net revenue from management service agreements .......... 90,187,458 6,079,109 22,372,566 --
------------- ------------- ------------- -------------
Total revenue ................................ 189,960,735 10,715,236 70,733,282 2,446,821
------------- ------------- ------------- -------------
Operating costs and administrative expenses:
Cost of affiliated physician management services ..... 42,245,211 2,796,623 9,655,973 --
Salaries, wages and benefits ......................... 52,313,062 3,636,973 29,708,554 1,207,750
Salaries, wages and benefits - related party (Note 11) -- -- 2,267,891 934,200
Professional fees .................................... 4,119,161 287,095 2,571,459 58,665
Professional fees - related party (Note 11) .......... -- -- 273,941 253,995
Supplies ............................................. 26,939,628 1,916,013 11,864,514 404,911
Utilities ............................................ 2,562,328 175,653 1,307,564 77,416
Depreciation and amortization ........................ 7,144,588 535,300 3,862,519 107,387
Rent ................................................. 7,653,298 565,106 4,043,465 56,244
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 .............................. 4,607,888 256,989 744,111 --
Other ................................................ 22,534,066 880,595 6,216,313 106,363
Other - related party (Note 11) ...................... -- -- 728,116 249,316
------------- ------------- ------------- -------------
170,119,230 11,050,347 77,475,152 3,648,489
------------- ------------- ------------- -------------
Interest expense, net ................................... 1,288,837 551,607 3,144,027 95,069
Interest expense shareholder (Note 11) .................. 369,366 259,888 1,708,174 --
(Income) loss from investment in affiliates ............. (709,295) 29,622 (569,156) --
------------- ------------- ------------- -------------
948,908 841,117 4,283,045 95,069
------------- ------------- ------------- -------------
Income (loss) before provision for income taxes ......... 18,892,597 (1,176,228) (11,024,915) (1,296,737)
Income tax expense ...................................... 6,836,066 -- -- --
------------- ------------- ------------- -------------
Net income (loss) (Note 2) .............................. $ 12,056,531 $ (1,176,228) $ (11,024,915) $ (1,296,737)
============= ============= ============= =============
Net income (loss) per weighted average share ............ $ 0.54 $ (0.08)
============= =============
Weighted average number of shares outstanding ........... 22,511,448 14,204,305
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-10
<PAGE>
PHYMATRIX CORP.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the year ended January 31, 1997, the month ended January 31, 1996,
the year ended December 31, 1995 and the period June 24 (inception)
to December 31, 1994
<TABLE>
<CAPTION>
Common Stock Retained
Outstanding Additional Earnings
--------------------------- Paid-in (Accumulated
Shares Amount Capital Deficit) Total
----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balances - June 24, 1994 ......................... -- $ -- $ -- $ -- $ --
Capital Contribution ............................. -- -- 12,963,713 -- 12,963,713
Loss for the period June 24, 1994
(inception) to December 31, 1994 ................ -- -- -- (1,296,737) (1,296,737)
----------- ------------- ------------- ------------- -------------
Balances - December 31, 1994 ..................... -- -- 12,963,713 (1,296,737) 11,666,976
Capital Contribution ............................. -- -- 12,036,287 -- 12,036,287
Loss for the year ended December 31, 1995 ........ -- -- -- (11,024,915) (11,024,915)
----------- ------------- ------------- ------------- -------------
Balances - December 31, 1995 ..................... -- -- 25,000,000 (12,321,652) 12,678,348
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
Loss for the month ended January 31, 1996 ........ -- -- -- (1,176,228) (1,176,228)
----------- ------------- ------------- ------------- -------------
Balances - January 31, 1996 ...................... 21,529,950 215,300 140,491,557 (13,497,880) 127,208,977
Adjustments for immaterial pooling of interests .. 432,645 4,326 -- 778,960 783,286
Issuance costs ................................... -- -- (743,316) -- (743,316)
Issuance of common stock for acquisitions ........ 406,272 4,062 9,222,977 -- 9,227,039
Issuance of common stock pursuant to stock plans.. 52,166 522 358,288 -- 358,810
Net income for the year ended January 31, 1997 ... -- -- -- 12,056,531 12,056,531
----------- ------------- ------------- ------------- -------------
Balances - January 31, 1997 ...................... 22,421,033 $ 224,210 $ 149,329,506 $ (662,389) $ 148,891,327
=========== ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-11
<PAGE>
PHYMATRIX CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Consolidated Consolidated Combined Combined
------------ ------------ ------------ ------------
Period From
One June 24
Month Combined (Inception)
Year Ended Ended Year Ended to
January 31, January 31, December 31, December 31,
1997 1996 1995 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................ $ 12,056,531 $ (1,176,228) $ (11,024,915) $ (1,296,737)
Noncash items included in net income (loss):
Depreciation and amortization ......................... 7,144,588 535,300 3,862,519 107,387
Amortization of debt issuance costs ................... 276,625 -- -- --
Writedown of assets ................................... -- -- 1,554,607 --
Other ................................................. (650,940) 430,334 140,151 --
Changes in receivables ................................... (10,466,616) (739,635) (5,419,998) (389,442)
Changes in accounts payable and accrued liabilities ...... (4,160,458) (796,011) 8,221,039 242,612
Changes in other assets .................................. 1,559,269 (19,072) (1,425,016) 2,473
------------- ------------- ------------- -------------
Net cash provided (used) by operating activities 5,758,999 (1,765,312) (4,091,613) (1,333,707)
------------- ------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures ..................................... (5,476,128) (184,460) (1,167,230) (107,348)
Sale of assets ........................................... 1,243,762 24,794 -- --
Notes receivable ......................................... (15,213,700) 686,400 (1,029,600) --
Repayments on notes receivable ........................... -- -- 343,200 --
Purchase of investments in affiliates .................... -- -- (9,790,588) (2,661,511)
Other assets ............................................. (1,440,176) -- (20,287) --
Acquisitions, net of cash acquired (Note 15) ............. (24,534,210) 54,252 (44,365,741) (8,183,902)
------------- ------------- ------------- -------------
Net cash provided (used) by investing
activities .................................... (45,420,452) 580,986 (56,030,246) (10,952,761)
------------- ------------- ------------- -------------
Cash flows from financing activities:
Capital contributions .................................... -- -- 12,036,287 12,963,713
Advances from (repayment to) shareholder ................. (15,523,287) (23,123,170) 36,690,180 --
Proceeds from issuance of common stock ................... 359,614 114,563,221 -- --
Proceeds from issuance of convertible
subordinated debentures ............................... 96,565,758 -- -- --
Proceeds from issuance of debt ........................... -- -- 19,143,127 --
Release of cash collateral ............................... 1,996,786 1,000,000 -- --
Cash collateralizing notes payable ....................... -- (5,403,337) -- --
Offering costs and other ................................. (2,823,130) -- (1,030,632) --
Repayment of debt ........................................ (7,134,228) (43,335,682) (3,797,435) --
------------- ------------- ------------- -------------
Net cash provided by financing activities ...... 73,441,513 43,701,032 63,041,527 12,963,713
------------- ------------- ------------- -------------
Increase in cash and cash equivalents ........................ 33,780,060 42,516,706 2,919,668 677,245
Cash and cash equivalents, beginning of period ............... 46,113,619 3,596,913 677,245 --
------------- ------------- ------------- -------------
Cash and cash equivalents, end of period ..................... $ 79,893,679 $ 46,113,619 $ 3,596,913 $ 677,245
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-12
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Description of Business and Organization
PhyMatrix Corp. ("the Company") is a multi-specialty 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 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
and financial statements as of and for the one month period ended January 31,
1996 are included herein.
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 period June 24, 1994 (inception) through December
31, 1994 and the year ended December 31, 1995 have been prepared to reflect the
combination of these business entities which have operated since their purchase
date under common control. 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 period June 24, 1994 (inception) through December 31, 1994
and the year ended 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. 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. 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 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.
F-13
<PAGE>
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 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.
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.
F-14
<PAGE>
Third Party Reimbursement
For the year ended January 31, 1997, the month ended January 31,1996, the
year ended December 31, 1995 and for the period from June 24, 1994 (inception)
to December 31, 1994, approximately 34%, 43%, 40% and 34%, respectively, of the
Company's net revenue was primarily from the participation of the Company's home
health care entities and physician practices in Medicare programs. Medicare
compensates the Company on a "cost reimbursement" basis for home health care,
meaning Medicare covers all reasonable costs incurred in providing home health
care. Medicare compensates the Company for physician services based on
predetermined fee schedules. In addition to extensive existing governmental
health care regulation, there are numerous initiatives at the federal and state
levels for comprehensive reforms affecting the payment for and availability of
health care services. Legislative changes to federal or state reimbursement
systems could adversely and retroactively affect recorded revenues.
Property and Equipment
Additions are recorded at cost and depreciation is recorded principally by
use of the straight-line method of depreciation for buildings, improvements and
equipment over their useful lives. Upon disposition, the cost and related
accumulated depreciation are removed from the accounts and any gain or loss is
included in income. Maintenance and repairs are charged to expense as incurred.
Major renewals or improvements are capitalized. Assets recorded under capital
leases are amortized over 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.
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.
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
$2,657,727, $959,210 and $840,928 at January 31, 1997, January 31, 1996 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, $315,336 and
$254,741 at January 31, 1997, January 31,1996 and December 31, 1995.
F-15
<PAGE>
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.
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.
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.
Reclassifications
Certain prior year balances have been reclassified to conform with the
current year presentation.
F-16
<PAGE>
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 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.
Physician Practice Acquisitions/Mergers
During the year ended January 31, 1997, 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 $1,058,400
payable in Common Stock of the Company to be issued during the second quarter of
fiscal year 1998. The Common Stock to be issued is based upon the average price
of the stock during the five business days prior to the issuance. The value of
the Common Stock to be issued has been recorded in other long term liabilities
at 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.
F-17
<PAGE>
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 $300,000 was paid
in the form of a convertible note with a maturity in May 1997. The Company has
the option to make such $300,000 payment at its discretion in either cash or
Common Stock of the Company with such number of shares to be based upon the
average price of the stock during the five business days preceding such date.
The purchase price has been allocated to the assets at their fair market value,
including management service agreements of approximately $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 $550,954
of such purchase price is payable in Common Stock of the Company to be issued
during May and June 1997. The number of shares of Common Stock of the Company to
be issued is based upon the average price of the stock during the five business
days prior to the issuance. The value of the Common Stock to be issued has been
recorded in other long term liabilities at 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 $280,000 is payable during July 1997 in Common Stock of the
Company with such number of shares to be based upon the average price of the
stock during the five business days prior to the issuance. The value of the
Common Stock to be issued has been recorded in other long term liabilities at
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 $1,920,000 is payable during August 1997 in Common Stock of the
Company with such number of shares to be purchased based upon the average price
of the stock during the five business days prior to the issuance. The value of
the Common Stock to be issued has been recorded in other long term liabilities
at 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.
F-18
<PAGE>
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 $692,800 is payable during August 1997 in Common Stock of the Company
with such number of shares to be purchased based upon the average price of the
stock during the five business days prior to the issuance. The value of the
Common Stock to be issued has been recorded in other long term liabilities at
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 $2,374,400 is payable during August 1997 in Common Stock of the Company
with such number of shares to be purchased based upon the average price of the
stock during the five business days prior to the issuance. The value of the
Common Stock to be issued has been recorded in other long term liabilities at
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 $535,000 is payable during October 1997 in Common Stock of the
Company with such number of shares to be purchased based upon the average price
of the stock during the five business days prior to the issuance. The value of
the Common Stock to be issued has been recorded in other long term liabilities
at 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, $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.
Medical Support Service Companies Acquisition
During October 1996, the Company purchased the assets of an outpatient
ambulatory surgical center in Florida. The Company entered into a lease whereby
the surgical center was leased to a partnership with an initial term of
15 years. In addition, the Company entered into a 20-year management agreement
pursuant to which the Company receives a management fee which is based upon the
performance of the surgical
F-19
<PAGE>
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.
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
F-20
<PAGE>
be required to be made during the next three years if certain pre-tax earnings
thresholds are achieved. The Company has committed to fund approximately
$2,400,000 to Network during the next three years. Such advances can be in the
form of a demand loan or for additional ownership interests if the other owners
do not elect to contribute their pro-rata share of any additional capital
contribution ($100,000 of additional capital contribution for an additional 1%
interest) in Network. During the first three years the Company has the option to
purchase up to an additional 29% ownership interest. During years four and five
the owners of 29% of Network have the right to require the Company to purchase
their interests at the option price.
Year Ended December 31, 1995
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 Service 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. In connection with the Pinnacle merger there is a
$5,200,000 maximum payment that may be required to be paid that is based on
earnings and will be made in the form of shares of Common Stock of the Company
valued as of the earnings measurement date. The contingent consideration
represents the full purchase price. 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 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
F-21
<PAGE>
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 Service Companies Acquisitions During September 1994, an
80% owned subsidiary of the Company purchased substantially all of the assets of
Uromed Technologies, Inc. ("Uromed"), a provider of lithotripsy services in
Florida, for a purchase price of $3,141,535 plus the assumption of capital lease
obligations of $1,097,614. The Company intends to acquire the outstanding 20%
interest in the subsidiary. During November 1994, the Company purchased 80% of
the stock of Nutrichem, Inc. ("Nutrichem"), an infusion therapy company doing
business in Maryland, Virginia and the District of Columbia, for $3,528,704 in
cash and a contingent note in the amount of $6,666,667, subject to adjustments.
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 to date 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.
The unaudited pro forma information presented below is for illustrative
informational purposes only and is not necessarily indicative of results which
would have been achieved or results which may be achieved in the future (in
thousands except per share amounts):
<TABLE>
<CAPTION>
Pro Forma
----------------------------
January 31, December 31,
1997 1995
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Revenue $227,065 $180,271
Net income (loss) 11,081 (323)
Net income (loss) per share $0.47 $(0.01)
======== ========
Number of shares used in pro forma
net income (loss) per share calculation 23,455 23,455
======== ========
</TABLE>
F-22
<PAGE>
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 are due in one installment on August 15,
1997. Interest on the loan accrues 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:
<TABLE>
<CAPTION>
Estimated January 31,
Useful Life --------------------------- December 31,
(Years) 1997 1996 1995
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Land -- $2,714,948 -- --
Building 15-20 1,569,170 $7,852,653 $7,852,653
Furniture and fixtures 5-7 10,107,182 5,448,394 5,312,385
Equipment 7-10 23,704,983 21,350,946 21,789,876
Automobiles 3-5 128,168 43,977 50,058
Computer software 5 981,696 948,056 950,346
Leasehold improvements 4-20 6,823,262 6,047,403 6,045,393
------------ ------------- ------------
Property and equipment, gross 46,029,409 41,691,429 42,000,711
Less accumulated depreciation (7,362,886) (2,972,343) (2,641,383)
------------ ------------- ------------
Property and equipment, net $38,666,523 $38,719,086 $39,359,328
============ ============= ============
</TABLE>
Depreciation expense was $4,094,131, $355,584, $2,761,000 and $70,240,
respectively, for the year ended January 31, 1997, the month ended January 31,
1996, the year ended December 31, 1995 and the period June 24, 1994 (inception)
to December 31, 1994.
Included in property and equipment at January 31, 1997, January 31, 1996
and December 31, 1995 are assets under capital leases of $3,520,819, $8,629,133
and $9,483,145, respectively, with accumulated depreciation of $987,070,
$554,536 and $842,879, respectively.
F-23
<PAGE>
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.
7. Accrued and Other Current Liabilities
Accrued and other current liabilities consist of the following:
<TABLE>
<CAPTION>
January 31,
-------------------------- December 31,
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Accrued closure costs $ 570,000 $ 570,000 $ 570,000
Accrued rent 1,141,618 810,062 799,551
Accrued income taxes 1,991,368 - -
Accrued professional fees 4,502,263 438,825 445,250
Accrued additional purchase price 1,000,000 - -
Accrued offering costs - 1,825,732 885,770
Accrued interest 991,977 381,894 738,317
Accrued bonus payments - 274,120 4,718,564
Unearned revenue 331,445 - -
Other 916,269 1,893,475 1,210,080
------------ ----------- ------------
Total accrued and other
current liabilities $11,444,940 $6,194,108 $9,367,532
============ =========== ============
</TABLE>
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>
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 1996 1995
-------------- -------------- --------------
<S> <C> <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% 84,375 140,625 140,625
through November 1998.
Notes payable to a bank, with a maturity date of December 2001 and an 85,111 -- --
interest rate of 8.25%.
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. -- 130,000 130,000
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 -- 201,422 201,422
April 1996.
Line of credit note payable to a bank, due and payable on demand,
interest at the prime rate (8.50% at January 31, 1996). -- 400,000 400,000
Note payable to a bank, collateralized by the assets of a
multi-specialty group practice, payable in monthly installments
of $14,027, including interest at 7.50% and a final payment in 322,675 461,105 472,181
February 1999.
Note payable to a bank, collateralized by the assets of a
multi-specialty group practice, payable in monthly installments
of $20,608, at 8.75% and a final payment in August 2000. 758,335 895,075 918,779
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 712,836 -- --
November 2001.
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 -- -- 3,567,408
offering), including interest at 8%.
Related party notes payable to the shareholders of DASCO, payable in
May 1996, including interest at 6.37%. -- 4,610,588 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 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). -- 10,147,287 36,690,180
Capital lease obligations with maturity dates through September 2015
and interest rates ranging from 8.75% to 12%. 3,173,172 8,704,179 9,163,215
-------------- -------------- --------------
111,422,450 31,093,618 96,941,201
Less current portion of capital leases (842,445) (357,791) (756,767)
Less current portion of debt (2,903,055) (2,194,515) (25,905,743)
Less current portion of related party debt -- (4,740,588) (4,740,588)
-------------- -------------- --------------
Long term debt and capital leases $107,676,950 $23,800,724 $65,538,103
============== ============== ==============
</TABLE>
F-25
<PAGE>
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 $2,903,055 $1,145,616
Through January 31, 1999 1,852,954 686,960
Through January 31, 2000 1,414,624 429,075
Through January 31, 2001 1,439,971 388,477
Through January 31, 2002 638,675 253,490
Thereafter 100,000,000 1,861,894
------------- -----------
Total 108,249,279 4,765,512
Less amounts representing interest and executory costs - (1,592,340)
------------- -----------
Present value of minimum lease payments 108,249,279 3,173,172
Less current portion (2,903,055) (842,445)
------------- -----------
Long term portion $105,346,224 $2,330,727
============= ===========
</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 $ 9,494,771
1999 6,816,351
2000 5,940,868
2001 3,567,224
2002 2,766,111
Thereafter 5,513,463
------------
$34,098,788
============
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.
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 multi-specialty 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.
F-26
<PAGE>
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.
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 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. Plaintiffs' Opposition to that motion is
due in late April, and the Company intends to file a Reply brief in May. No
hearing on the Motion has been scheduled yet by the Court. The Company intends
to continue to defend the case vigorously.
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 Court has not yet
scheduled a hearing on the Motion, but one should be scheduled soon. The Court
indicated at a Status Conference on January 14, 1997 that the case would be
placed on a trial list in March 1997 but that the case would be near the bottom
of that list, and not likely to be reached for trial until later this year. On
April 17, 1997 the Court published a two-
F-27
<PAGE>
week trial list for May 13, 1997 on which this case appears at number 18. The
Company is not a party to this litigation and its exposure is limited to its
obligation under its by-laws to indemnify the former officers and directors of
RCI to the fullest extent permitted by Delaware law. The Company intends to
continue to vigorously defend against this litigation.
11. Related Party Transactions
For the year ended December 31, 1995 and the period June 24, 1994
(inception) to December 31, 1994, Continuum Care of Massachusetts, Inc., whose
principal shareholder is Mr. Gosman, provided management services to the
Company. Fees for these services in the amount of $3,729,680 and $1,629,753,
respectively, have been included in the financial statements and consist of the
following:
December 31,
----------------------------
1995 1994
------------ -----------
Salaries, wages and benefits $2,267,891 $ 934,200
Professional fees 273,941 253,955
Rent 459,732 192,242
Other 728,116 249,316
------------ -----------
$3,729,680 $1,629,713
============ ===========
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 year ended December 31, 1995 and the
period June 24, 1994 (inception) to December 31, 1994, respectively, for the
Company's principal office space in West Palm Beach, Florida. The lessee of the
office space 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 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
F-28
<PAGE>
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.
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
F-29
<PAGE>
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, January 31, 1996 and December 31, 1995 is $111,422,450,
$31,093,618 and $96,941,201, respectively.
13. Employee Benefit Plan
The Company sponsors a 401(k) plan, covering substantially all of its employees.
Contributions under the 401(k) plan equal 50% of the participants' contributions
up to a maximum of $400 per participant per year.
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 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 and the
one month period ended January 31, 1996 are as follows:
1997 1996
--------- --------
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 and January 31, 1996 are as follows:
1997 1996
------------- -------------
Deferred tax asset
Allowance for doubtful accounts,
reserves and other accrued expenses $ 1,493,180 $ 1,648,049
Net operating loss 13,226,228 14,459,028
------------- -------------
Total deferred tax assets 14,719,408 16,107,077
------------- -------------
Deferred tax liability
Property and depreciation (856,173) (70,787)
Amortization (647,902) (270,421)
Other (318,165) (281,720)
------------- -------------
Total deferred tax liability (1,822,240) (622,928)
------------- -------------
Deferred tax asset (liability) 12,897,168 15,484,149
------------- -------------
Valuation allowance (14,251,349) (15,484,149)
============= =============
Net deferred tax asset (liability) $ (1,354,181) $ 0
============= =============
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-30
<PAGE>
The reconciliation of income tax computed at statutory rates to income tax
expense is as follows:
1997 1996
---------- ---------
Statutory rate 35% (35%)
Permanent differences 1% 0%
State income tax (net of federal
benefit) 5% 0%
Valuation allowance (7%) 35%
Other 2% 0%
-------- --------
36% 0%
======== ========
15. Supplemental Cash Flow Information
During the year ended January 31, 1997, the month ended January 31, 1996
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 1996 1995
------------ ------------ ------------
Current assets $ 4,692,389 $ 123,963 $ 12,463,007
Property, plant and equipment 4,693,603 70,418 40,817,404
Intangibles 49,593,414 12,666,694 43,155,934
Other noncurrent assets 25,541 (8,895,714) 2,197,691
Current liabilities (9,667,604) (1,267,752) (8,174,988)
Debt (3,189,295) 0 (43,179,672)
Noncurrent liabilities (11,603,513) 1,248,139 (2,913,635)
Equity (10,010,325) (4,000,000) 0
------------- ------------ -------------
Net cash used for acquisitions $24,534,210 $ (54,252) $ 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, one month ended January 31, 1996 and the year ended
December 31, 1995 was $5,450,718, $2,876,636 and $2,754,082, respectively.
Income taxes paid for the year ended January 31,1997 were $3,320,241. There was
no interest paid for the period from June 24, 1994 (inception) to December 31,
1994 and there were no income taxes paid for the one month ended January 31,
1996, the year ended December 31, 1995 or the period from June 24, 1994
(inception) to December 31, 1994.
16. Stock Option Plan
The Company has adopted a stock option plan and authorized the issuance of
3,000,000 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:
F-31
<PAGE>
<TABLE>
<CAPTION>
Year Ended Month Ended Year Ended
January 31, 1997 January 31,1996 December 31, 1995
------------------------ ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of period 1,200,500 $14.49 572,500 $10.93 127,500 $ 4.00
Options granted 1,122,500 20.35 628,000 17.27 445,000 13.65
Options exercised (52,166) 6.97 - - - -
Options canceled (23,334) 18.14 - - - -
---------- ---------- ----------
Outstanding, end of period 2,247,500 17.52 1,200,500 $14.49 572,500 $10.93
========== ========== ========== ========== ========== ==========
Weighted average fair value of
options granted during the year $10.07 $7.36 $6.67
========== ========== ==========
</TABLE>
At January 31, 1997, January 31, 1996 and December 31, 1995 options for
595,085, 47,500 and 47,500, respectively were exercisable.
Significant option groups outstanding at January 31, 1997 and related
weighted average price and life are as follows:
<TABLE>
<CAPTION>
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
- --------------------------- ------------ ------------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$3.00 - $5.00 122,000 7.7 years $4.08 62,001 $4.16
$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
</TABLE>
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.
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 Month Ended Year Ended
January 31, January 31, December 31,
1997 1996 1995
------------ ------------ ------------
Net income (loss)
As reported $12,057 $(1,176) $(11,025)
Pro forma 9,647 (1,226) (11,073)
Earnings (loss) per common share
As reported $0.54 $(0.08) -
Pro forma 0.43 (0.09) -
F-32
<PAGE>
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 year ended
January 31, 1997 and the month ended January 31, 1996 the weighted average
number of common shares outstanding were 22,511,488 and 14,204,305 respectively.
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. 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 $170,912 $19,049 $189,961
Operating income 9,417 11,133 20,550
Identifiable assets 279,123 19,001 298,124
Depreciation & amortization 6,856 288 7,144
Capital expenditures 3,036 2,440 5,476
19. Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly results of operations
for the periods shown:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Year Ended January 31, 1997
------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- -------- -------- -----------
<S> <C> <C> <C> <C>
Net revenues $37,207 $40,424 $51,738 $60,592
Income before income taxes 3,696 4,398 5,169 5,630
Net income 2,292 2,770 3,283 3,712
Net income per share $0.11 $0.13 $0.15 $0.16
Year Ended December 31, 1995
------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- -------- ------------ ----------
Net revenues $ 6,669 $13,315 $20,134 $30,616
Loss before income taxes (2,306) (A) (1,846) (2,332) (B) (4,541) (C)
Net loss (D) (2,306) (A) (1,846) (2,332) (B) (4,541) (C)
</TABLE>
- ----------------------
(A) Includes $1,111 non-recurring earnout payment.
(B) Includes $160 non-recurring earnout 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.
F-33
<PAGE>
20. Subsequent Events
During February 1997, the Company closed in escrow on an agreement to
manage a physician group consisting of 32 physicians in Maryland.
During March 1997, the Company signed a binding letter of intent to merge
with Clinical Studies, Ltd. ("CSL"). CSL is one of the largest site management
organizations ("SMOs") in the country. SMOs are management service companies
that organize and manage multisite clinical investigators. CSL wholly owns and
operates 19 Phase I-IV research centers and is dedicated to the rapid enrollment
of quality volunteers for investigational drug research in multiple therapeutic
areas such as central nervous system, gerontology, women's health and
endocrinology. The merger is subject to being accounted for as a pooling of
interests.
During April, the Company signed a letter of intent with Beth Israel
Hospital to form an MSO to provide management services to the medical community
in the greater metropolitan New York area. The Company will acquire and manage
the physician practice management operations of Beth Israel Health Care System,
which consists of 130 physicians with more than 20 primary and specialty medical
offices located throughout New York City and Rockland and Westchester counties.
F-34
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
The Company is a Delaware corporation. Reference is made to Section 145 of
the Delaware General Corporation Law, as amended, which provides that a
corporation may indemnify any person who was or is a party to or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation) by reason of the fact that he
is or was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceedings, had no reasonable cause to believe his conduct was unlawful.
Section 145 further provides that a corporation similarly may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation and except
that no indemnification shall be made in respect of any claim, issue or matter
as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware Court of Chancery
or the court in which such action or suit was brought shall determine upon
application that, despite an adjudication of liability, but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper. The Company's Certificate of Incorporation further provides
that the Company shall indemnify its directors and officers to the full extent
permitted by the law of the State of Delaware.
The Company's Certificate of Incorporation provides that the Company's
directors shall not be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except to the extent that
exculpation from liability is not permitted under the Delaware General
Corporation Law as in effect at the time such liability is determined.
The Company maintains an indemnification insurance policy covering all
directors and officers of the Company and its subsidiaries.
Item 21. Exhibits and Financial Statements
(a) Exhibits. The following is a list of exhibits which are incorporated
as part of the Registration Statement by reference.
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ------------- -----------------------------------------------------------------------------------------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company.
3.2 By-laws of the Company.
+4 Indenture with respect to the Company's 6-3/4% Convertible Subordinated Debentures.
10.1 Stock Purchase Agreement dated May 31, 1995 by and among Dasco Development
Corporation, Dasco Development West, Inc., Donald A. Sands, Bruce A. Rendina and
Abraham D. Gosman.
10.2 Shareholders' Agreement dated as of May 31, 1995 by and among Donald A. Sands, Bruce A.
Rendina, Abraham D. Gosman, DASCO Development Corporation and DASCO
Development West, Inc.
++10.3 Asset Purchase Agreement dated August 21, 1996 between Eric Moskow, Richard Lipton,
Wayne Lipton, Physician's Choice, LLC and Physician's Choice, Inc.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ------------- ----------------------------------------------------------------------------------------
<S> <C>
10.4 Registration Agreement dated January 29, 1996 between PhyMatrix Corp. and various
stockholders of PhyMatrix Corp.
+10.5 Registration Agreement dated June 21, 1996 between PhyMatrix Corp. and the Initial
Purchasers.
10.6 (M) Employment Agreement dated as of January 1, 1995 between DASCO and Bruce A. Rendina.
10.7 (M) Employment Agreement dated September 22, 1994 between Continuum Care of Massachusetts,
Inc. and Edward E. Goldman, M.D.
10.8 (M) 1995 Equity Incentive Plan.
21 Subsidiaries of the Registrant.
*23.1 Consent of Coopers & Lybrand L.L.P.
**24.1 Power of Attorney (Contained on Page II-5)
</TABLE>
- ----------
* Filed herewith.
** Previously filed.
+ Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-08269).
++ Incorporated by reference to the Company's Current Report on Form 8-K dated
September 30, 1996.
(M) Management contract or compensatory plan.
All other exhibits are hereby incorporated by reference to the Company's
Registration Statement on Form S-1 (Registration No. 33-97854).
Item 22. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted against such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-2
<PAGE>
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
Provided, however, that paragraphs (1)(i) and (1)(ii) of this section do
not apply if the registration statement is on Form S-3, Form S-8 or Form F-3,
and the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or furnished to
the Commission by the registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(4) The undersigned registrant hereby undertakes that, for the purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(5) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other Items of the applicable
form.
(6) That every prospectus (i) that is filed pursuant to paragraph (4)
immediately preceeding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a apart of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(7) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt
of such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(8) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 30th day of
June 1997.
PHYMATRIX CORP.
By: /s/ Frederick R. Leathers
-------------------------------------
Frederick R. Leathers
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
/s/ *
- --------------------------- June 30, 1997
Abraham D. Gosman
Chairman of the Board of
Directors and
Chief Executive Officer
(Principal Executive Officer)
/s/ Frederick R. Leathers June 30, 1997
- -------------------------
Frederick R. Leathers
Chief Financial Officer
(Principal Financial and
Accounting Officer)
- ----------------------------
Robert A. Miller
Director and President
/s/ *
- --------------------------- June 30, 1997
Bruce Rendina
Vice Chairman of the Board of
Directors
/s/ *
- --------------------------- June 30, 1997
Joseph N. Cassese
Director
/s/ *
- --------------------------- June 30, 1997
David Livingston, M.D.
Director
- -------------------------
Stephen E. Ronai, Esq.
Director
II-4
<PAGE>
/s/ * June 30, 1997
- -------------------------
Governor Hugh L. Carey
Director
/s/ * June 30, 1997
- -------------------------
John Chay
Director
- -------------------------
Eric Moskow
Director and Executive Vice
President Strategic Planning
* By: /s/ Frederick R. Leathers June 30, 1997
--------------------------
Frederick R. Leathers
Attorney-in-fact
II-5
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-4
(File No. 333-09187) of our report dated March 13, 1997, except as to
information presented in Note 20, for which the date is April 24, 1997, on our
audits of the consolidated financial statements and financial statement schedule
of PhyMatrix Corp. as of January 31, 1997 and January 31, 1996, and for the year
ended January 31, 1997, and for the one month period ended January 31, 1996 and
the combined financial statements of PhyMatrix Corp. as of December 31, 1995 and
for the year ended December 31, 1995 and for the period ended June 24, 1994
(inception) to December 31, 1994. We also consent to the reference to our firm
under the caption "Experts."
Boston, Massachusetts
June 24, 1997
