SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended July 31, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period from _______ to
Commission file number 0-27568
PhyMatrix Corp.
(Exact name of registrant as specified in its charter)
Delaware 65-0617076
(State of incorporation) (I.R.S. Employer Identification No.)
Phillips Point, Suite 1000E
777 S. Flagler Drive, West Palm Beach, Florida 33401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 655-3500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such Reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
On September 9, 1997, the number of outstanding shares of the registrant's
Common Stock, par value $0.01 per share, was 24,137,376.
<PAGE>
PHYMATRIX CORP.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - July 31, 1997 (unaudited) and January 31, 1997 3
Consolidated Statements of Operations (unaudited) - Three and Six Months Ended July 31, 4
1997 and 1996
Consolidated Statements of Cash Flows (unaudited) - Six Months Ended July 31, 1997 and 1996 5
Notes to Consolidated Financial Statements (unaudited) - Three
and Six Months Ended July 31, 1997 and 1996 6-8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 2. Changes in Securities 14
Item 6. Exhibits and Reports on Form 8-K 14
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 14
</TABLE>
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<PAGE>
PART I - FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements
PHYMATRIX CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, January 31,
1997 1997
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 58,638,326 $ 79,893,679
Receivables:
Accounts receivable, net 48,949,768 35,846,268
Other receivables 3,440,009 2,318,395
Notes receivable 2,364,537 10,125,000
Prepaid expenses and other current assets 5,538,993 3,680,709
------------- -------------
Total current assets 118,931,633 131,864,051
Property, plant and equipment, net 40,214,895 38,666,523
Notes receivable 7,884,700 4,938,700
Goodwill, net 84,355,699 67,169,274
Management service agreements, net 56,078,028 40,196,102
Investment in affiliates 3,517,934 3,399,859
Other assets (including restricted cash) 12,400,247 11,889,338
------------- -------------
Total assets $ 323,383,136 $ 298,123,847
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of debt and capital leases $ 3,522,190 $ 3,745,500
Accounts payable 7,449,454 7,728,234
Accrued compensation 1,002,940 1,480,250
Accrued liabilities 12,353,045 11,444,940
------------ -------------
Total current liabilities 24,327,629 24,398,924
Long-term debt and capital leases, less current portion 7,863,224 7,676,950
Convertible subordinated debentures 100,000,000 100,000,000
Other long term liabilities 11,759,706 14,004,143
Deferred tax liability - 1,354,182
Minority interest 1,854,455 1,798,321
------------ -------------
Total liabilities 145,805,014 149,232,520
Commitments and contingencies
Shareholders' equity:
Common Stock, par value $.01; 40,000,000 shares authorized;
23,926,850 and 22,421,033 shares issued and outstanding
at July 31, 1997 and January 31, 1997, respectively 239,269 224,210
Additional paid in capital 169,160,700 149,329,506
Retained earnings (deficit) 8,178,153 (662,389)
------------ -------------
Total shareholders' equity 177,578,122 148,891,327
------------ -------------
Total liabilities and shareholders' equity $ 323,383,136 $ 298,123,847
============ =============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
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PHYMATRIX CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Net revenues from services $35,466,628 $21,055,244 $ 69,961,529 $41,107,522
Net revenue from management service agreements 40,022,268 19,368,739 75,685,223 36,523,555
----------- ----------- ------------ -----------
Total revenue 75,488,896 40,423,983 145,646,752 77,631,077
----------- ----------- ------------ -----------
Operating costs and administrative expenses:
Cost of affiliated physician management services 16,558,128 8,879,136 33,534,991 17,412,247
Salaries, wages and benefits 17,459,790 12,172,957 33,811,558 23,832,872
Professional fees 1,679,590 1,102,847 3,140,177 2,004,445
Supplies 10,823,207 6,097,539 19,719,512 11,580,443
Utilities 943,190 593,915 1,877,154 1,178,520
Depreciation and amortization 2,361,439 1,672,977 4,533,310 3,265,688
Rent 3,448,507 1,734,748 6,521,290 3,440,823
Provision for bad debts 1,014,993 740,529 2,315,071 1,320,777
Other 14,097,505 2,617,372 26,481,954 4,960,092
----------- ---------- ------------ -----------
Total operating costs and
administrative expenses 68,386,349 35,612,020 131,935,017 68,995,907
----------- ----------- ------------ -----------
Interest expense, net 726,133 399,421 1,382,600 440,412
Interest expense shareholder - 140,886 - 369,366
Income from investment in affiliates (195,108) (127,051) (412,985) (268,998)
----------- ----------- ------------ -----------
531,025 413,256 969,615 540,780
----------- ----------- ------------ -----------
Income before provision for income taxes 6,571,522 4,398,707 12,742,120 8,094,390
Income tax expense 2,300,934 1,627,856 4,545,904 3,031,881
----------- ----------- ------------ -----------
Net income $ 4,270,588 $ 2,770,851 $ 8,196,216 $5,062,509
=========== =========== ============ ===========
Net income per weighted average share $ 0.18 $ 0.13 $ 0.34 $ 0.23
----------- ----------- ------------ -----------
Weighted average number of shares outstanding 24,266,939 21,845,841 23,863,289 21,689,631
=========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
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<PAGE>
PHYMATRIX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ending July 31,
---------------------------
1997 1996
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $8,196,216 $5,062,509
Noncash items included in net income:
Depreciation and amortization 4,533,310 3,265,688
Other (626,401) 19,252
Changes in receivables (9,054,502) (6,493,010)
Changes in accounts payable and accrued liabilities (2,388,635) (1,012,392)
Changes in other assets (1,714,443) (1,879,705)
----------- -------------
Net cash used by operating activities (1,054,455) (1,037,658)
----------- -------------
Cash flows from investing activities:
Capital expenditures (2,614,421) (1,684,607)
Sale of assets 1,490,000 -
Repayments of notes receivable 10,000,000 -
Advances under notes receivable (5,310,537) (250,000)
Other assets (605,490) (84,285)
Acquisitions, net of cash acquired (22,250,306) (6,980,003)
------------ -------------
Net cash used by investing activities (19,290,754) (8,998,895)
------------ -------------
Cash flows from financing activities:
Repayment to shareholder - (15,446,759)
Proceeds from issuance of common stock 649,727 205,000
Proceeds from issuance of convertible subordinated
debentures (114,281) 97,102,738
Release of cash collateral 480,182 1,537,282
Offering costs and other (618,658) (2,343,015)
Repayment of debt (1,668,563) (5,466,118)
Proceeds from debt 361,449 -
----------- ------------
Net cash provided (used) by financing
activities (910,144) 75,589,128
----------- ------------
Increase (decrease) in cash and cash equivalents (21,255,353) 65,552,575
Cash and cash equivalents, beginning of period 79,893,679 46,113,619
------------ ------------
Cash and cash equivalents, end of period $58,638,326 $111,666,194
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
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<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended July 31, 1997 and 1996 (Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
include the accounts of PhyMatrix Corp. ("the Company"). These interim
consolidated 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 and six months
ended July 31, 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 was allocated to the assets at their fair market value,
including management service agreements of $1,499,013. The resulting intangible
is being amortized over 40 years.
During 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 goodwill and is
being amortized over 30 years.
During May 1997, the Company entered into a 40-year management agreement
with a radiation therapy center in Westchester, New York. The purchase price was
$2,550,000. Of such purchase price $1,200,000 was paid in cash and $1,350,000 is
payable during May 1998 in Common Stock of the Company with such number of
shares to be issued based upon the average price of the stock during the five
business days prior to the issuance. The value of the Common Stock to be issued
has been recorded in other long-term liabilities at July 31, 1997. The purchase
price has been allocated to management service agreements and is being amortized
over 40 years.
During June 1997, the Company purchased the assets of two diagnostic
imaging centers in Dade County, Florida. The purchase price was approximately
$12,500,000 plus the assumption of debt and capital leases totaling $1,570,078.
Of such purchase price, $500,000 was paid in cash and the remaining $12,000,000
was paid by the issuance of 773,026 shares of Common Stock of the Company,
562,500 of which were issued in June and 210,526 of which were issued in
September. The purchase price was allocated to the assets at their fair market
value, including goodwill of $10,180,273. The resulting intangible is being
amortized over 30 years.
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<PAGE>
During June 1997, the Company acquired the remaining 20% interest in a
lithotripsy company that it purchased during 1994. The interest was acquired in
exchange for cash and 54,500 shares of Common Stock of the Company having a
total value of $2,005,000. The purchase price was allocated to goodwill and is
being amortized over 20 years.
During June 1997, the Company issued 100,002 shares of Common Stock of the
Company having a value of approximately $1,500,000 to the former shareholders of
Pinnacle Associates, Inc. ("Pinnacle"). The issuance of the shares represented
the merger consideration for Pinnacle which was purchased during 1995.
During July 1997, the Company entered into a management services agreement
with Beth Israel Hospital to manage its DOCS Division which consists of more
than 100 physicians located throughout the greater Metropolitan New York area.
In addition, the Company and Beth Israel Hospital will be completing the
formation of an MSO to manage the medical risk contracting to the more than
2,000 physicians affiliated with Beth Israel Hospital and its parent
corporation. The Management Services Agreement became effective July 1, 1997,
and will remain in effect for 40 years contingent upon the closing of the MSO
joint venture prior to January 15, 1998. The Company has committed up to $40
million in conjunction with the transaction to be utilized for the expansion of
the Beth Israel delivery system throughout the New York region. In connection
with the agreement, the Company paid $13,560,000 in cash, which was allocated to
management service agreements and is being amortized over 40 years.
During the six months ended July 31, 1997 and 1996, the Company
acquired the assets and/or stock, entered into management and employment
agreements, and/or assumed certain liabilities of various physician practices,
medical support services companies, networks and organizations. The transactions
had the following non-cash impact on the balance sheets of the Company as of the
indicated dates:
July 31,
----------------------------------
1997 1996
--------------- --------------
Current assets $4,249,746 $1,742,127
Property, plant and equipment 1,879,378 851,418
Intangibles 35,355,150 7,228,386
Other noncurrent assets 885,766 -
Current liabilities 1,158,152 (1,476,665)
Debt (1,270,078) (302,452)
Noncurrent liabilities (97,846) (350,000)
Equity (19,909,962) (712,811)
During July 1997, the Company signed a merger agreement to acquire
Clinical Studies, Ltd. ("CSL") by merger. 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 21 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. While the Company intends to pursue the consummation of
this transaction, there can be no assurance that this transaction will be
consummated.
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<PAGE>
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 and six
months ended July 31, 1997 and 1996, the weighted average number of common
shares outstanding was 24,266,939, 23,863,289, 21,845,841 and 21,689,631,
respectively. When dilutive, stock options (less the number of treasury shares
assumed to be purchased from the proceeds) are included in the calculation of
the weighted average number of common shares outstanding. For the three and six
months ended July 31, 1997, conversion of the 6-3/4% Convertible Subordinated
Debentures issued in June 1996, is not assumed because the effect is
anti-dilutive.
4. EQUITY TRANSACTIONS
During the three months ended July 31, 1997, the Company issued 303,349
shares of stock, having a value of $4,539,355, which had been committed to be
issued in conjunction with acquisitions completed during the fiscal year ending
January 31, 1997 and were registered with the Securities and Exchange Commission
pursuant to a Registration Statement on Form S-4. The number of shares issued
was generally determined based on the average price of the stock prior to the
issuance. As of July 31, 1997, the Company has committed to issue an additional
$10,900,000 in Common Stock over the next 12 months. This amount has been
included in other long-term liabilities on the balance sheet.
5. RATIO OF EARNINGS TO FIXED CHARGES
For the three and six months ended July 31, 1997, the ratio of earnings to
fixed charges was 3.10 and 3.02, respectively. For purposes of computing the
ratio of earnings to fixed charges, earnings represent income from operations
before minority interest and income taxes, plus fixed charges. Earnings also
includes the equity in less-than-fifty-percent-owned investees only to the
extent of distributions. Fixed charges include interest, amortization of
financing costs and the portion of operating rental expense which management
believes is representative of the interest component of the rental expense.
6. SUBSEQUENT EVENTS
During August 1997, the Company purchased certain assets of, and entered
into a 20-year administrative services agreement with BAB Nuclear Radiology,
P.C., to operate five diagnostic imaging centers on Long Island, New York. The
purchase price was approximately $10,000,000 in cash, plus $15,000,000 in
convertible notes.
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<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
The Company is a multispecialty physician practice management company that
provides management services to the medical community. The Company also develops
medical malls, medical office buildings, and health parks, both for its own
account and for leading hospitals and health systems. The Company's primary
strategy is to develop management networks in specific geographic locations by
affiliating with physicians, medical providers and medical networks. The Company
affiliates with physicians by acquiring their practices and entering into
long-term management agreements with the acquired practices and by managing
independent physician associations ("IPAs") and specialty care physician
networks through management service organizations ("MSOs") in which the Company
has ownership interests. Where appropriate, the Company supports its affiliated
physicians with related diagnostic and therapeutic medical support services. The
Company's medical support services include radiation therapy, diagnostic
imaging, infusion therapy, home health care, lithotripsy services 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 over
350 physicians; has obtained interests in MSOs in Connecticut, Georgia, New
Jersey, New York and Florida that provide management services to IPAs composed
of over 4,100 multispecialty physicians; purchased a company that provides
contract management services to approximately 2,500 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.
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 was allocated to the assets at their fair market value,
including management service agreements of $1,499,013. The resulting intangible
is being amortized over 40 years.
During 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.
During May 1997, the Company entered into a 40-year management agreement
with a radiation therapy center in Westchester, New York. The purchase price was
$2,550,000. Of such purchase price $1,200,000 was paid in cash and $1,350,000 is
payable during May 1998 in Common Stock of the Company with such number of
shares to be issued based upon the average price of the stock during the five
business days prior to the issuance. The value of the Common Stock to be issued
has been recorded in other long-term liabilities at July 31, 1997. The purchase
price has been allocated to management service agreements and is being amortized
over 40 years.
During June 1997, the Company purchased the assets of two diagnostic
imaging centers in Dade County, Florida. The purchase price was approximately
$12,500,000 plus the assumption of debt and capital leases totaling
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<PAGE>
$1,570,078. Of such purchase price, $500,000 was paid in cash and the remaining
$12,000,000 was paid by the issuance of 773,026 shares of Common Stock of the
Company, 562,500 of which were issued in June and 210,526 of which were issued
in September. The purchase price was allocated to the assets at their fair
market value, including goodwill of $10,180,273. The resulting intangible is
being amortized over 30 years.
During June 1997, the Company acquired the remaining 20% interest in a
lithotripsy company that it purchased during 1994. The interest was acquired in
exchange for cash and 54,500 shares of Common Stock of the Company having a
total value of $2,005,000. The purchase price was allocated to goodwill and is
being amortized over 20 years.
During June 1997, the Company issued 100,002 shares of Common Stock of the
Company having a value of approximately $1,500,000 to the former shareholders of
Pinnacle Associates, Inc. ("Pinnacle"). The issuance of the shares represented
the merger consideration for Pinnacle which was purchased during 1995.
During July 1997, the Company entered into a management services agreement
with Beth Israel Hospital to manage its DOCS Division which consists of more
than 100 physicians located throughout the greater Metropolitan New York area.
In addition, the Company and Beth Israel Hospital will be completing the
formation of an MSO to manage the medical risk contracting to the more than
2,000 physicians affiliated with Beth Israel Hospital and its parent
corporation. The Management Services Agreement became effective July 1, 1997,
and will remain in effect for 40 years contingent upon the closing of the MSO
joint venture prior to January 15, 1998. The Company has committed up to $40
million in conjunction with the transaction to be utilized for the expansion of
the Beth Israel delivery system throughout the New York region. In connection
with the agreement, the Company paid $13,560,000 in cash, which was allocated to
management service agreements and is being amortized over 40 years.
During July 1997, the Company signed a merger agreement to acquire Clinical
Studies, Ltd. ("CSL") by merger. 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
21 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. While the Company intends to pursue the consummation of this
transaction, there can be no assurance that this transaction will be
consummated.
Accounting Treatment
The terms of the Company's relationships with its affiliated physicians are
set forth in various asset and stock purchase agreements, management service
agreements, and employment and consulting agreements. Through the asset and/or
stock purchase agreement, the Company acquires the equipment, furniture,
fixtures, supplies and, in certain instances, service agreements, of a physician
practice at the fair market value of the assets. The accounts receivable are
typically purchased at the net realizable value. The purchase price of the
practice generally consists of cash, notes and/or Common Stock of the Company
and the assumption of certain debt, leases and other contracts necessary for the
operation of the practice. The management services or employment agreements
delineate the responsibilities and obligations of each party.
Net revenue from management service agreements include the revenues
generated by the physician practices. The Company is responsible and at risk
for the operating costs of the physician practices. Expenses include the
reimbursement of all medical practice operating costs and all payments to
physicians (which are reflected as cost of affiliated physician management
services) as required under the various management agreements. For providing
services under management services agreements entered into prior to April 30,
1996, physicians generally received a fixed percentage of net revenue of the
practice. "Net revenues" is defined as all revenue computed on an accrual basis
generated by or on behalf of the practice after taking into account certain
contractual adjustments or allowances. The revenue is generated from
professional medical services furnished to patients by physicians or other
clinicians under physician supervision. In several of the practices, the
Company has
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<PAGE>
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 and six months ended July 31, 1997,
were $40.0 and $75.7 million, respectively.
Results of Operations
Three and Six Months Ended July 31, 1997 Compared to Three and Six Months Ended
July 31, 1996
The following discussion reviews the results of operations for the three
and six months ended July 31, 1997 (the "1997 Quarter" and "1997 Period"),
respectively, compared to the three and six months ended July 31, 1996 (the
"1996 Quarter" and "1996 Period"), respectively.
Revenues
The Company derives revenues from health care services and medical facility
development services. Within the health care segment, the Company distinguishes
between revenues from cancer services, noncancer physician services and other
medical support services. Cancer services include physician practice management
services to oncology practices and certain medical support services, including
radiation therapy, diagnostic imaging and infusion therapy. Noncancer physician
services include physician practice management services to all practices managed
by the Company other than oncology practices and administrative services to
health plans which include reviewing, processing, and paying claims and
subcontracting with specialty care physicians to provide covered services. Other
medical support services include home health care services, lithotripsy, various
health care management services, diagnostic imaging, and ambulatory surgery.
Net revenues were $75.4 million and $145.6 million for the 1997 Quarter and
1997 Period, respectively. Of this amount, $26.7 million and $52.2 million or
35.4% and 35.9% of such revenues was attributable to cancer services; $35.9
million and $67.9 million or 47.6% and 46.6% was related to noncancer physician
services; $7.6 million and $15.0 million or 10.1% and 10.3% of such revenues was
attributable to other medical support services; and $5.2 million and $10.5
million or 6.9% and 7.2% related to medical facility development.
Net revenues were $40.4 million and $77.6 million for the 1996 Quarter and
the 1996 Period. Such revenues consisted of $23.1 million and $44.2 million or
57.2% and 57.0% related to cancer services; $8.6 million and $15.9 million or
21.4% and 20.4% related to noncancer physician services; $4.9 million and $10.1
million or 12.2% and 13.0% related to other medical support services; and $3.7
million and $7.4 million or 9.2% and 9.5% related to medical facility
development.
Expenses
The Company's cost of affiliated physician management services was $16.6
million and $33.5 million or 41.4% and 44.3% of net revenue from management
services agreements during the 1997 Quarter and 1997 Period, respectively. The
cost of affiliated physician management services was $8.9 million and $17.4
million or 45.8% and 47.7% of net revenue from management services agreements
during the 1996 Quarter and 1996 Period, respectively. Net revenue for the
physician practices managed by the Company was $40.0 million and $75.7 million
during the 1997 Quarter and 1997 Period and $19.4 million and $36.5 million
during the 1996 Quarter and 1996 Period, respectively. 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 $5.3 million from
$12.2 million or 30.1% of net revenues during the 1996 Quarter to $17.5 million
or 23.1% of net revenues during the 1997 Quarter and $10.0 million from $23.8
million or 30.7% of net revenues during the 1996 Period to $33.8 million or
23.2% of net revenues during the 1997 Period. The decrease as a percentage of
net revenues is primarily attributable to (i) the fact that since the Company's
commencement of operations during the third quarter of 1994, it has been able to
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spread its salaries, wages, and benefits over a rapidly expanding revenue base
and (ii) salaries, wages, and benefits varies depending on whether the physician
practice is owned or managed.
The Company's supplies expense increased by $4.7 million from $6.1 million
or 15.1% of net revenues during the 1996 Quarter to $10.8 million or 14.3% of
net revenues during the 1997 Quarter and $8.1 million from $11.6 million or
14.9% of net revenues during the 1996 Period to $19.7 million or 13.5% of net
revenues during the 1997 Period. The increase in supplies expense is primarily a
result of the acquisition of additional physician practices. Supplies expense as
a percentage of net revenues varies depending upon the type of physician
practices.
The Company's depreciation and amortization expense increased by $0.7
million from $1.7 million or 4.1% of net revenues during the 1996 Quarter to
$2.4 million or 3.1% of net revenues during the 1997 Quarter and $1.2 million
from $3.3 million or 4.2% of net revenues during the 1996 Period to $4.5 million
or 3.1% of net revenues during the 1997 Period. The increase is primarily a
result of the acquisitions completed after the 1996 Quarter and the allocation
of the purchase prices as required by purchase accounting. During the 1997
Period, the Company sold the assets of an entity that it acquired in March 1995
and subsequently closed. The sale of the assets resulted in a gain of $0.7
million. In addition, the Company recorded nonrecurring charges of $0.4 million
during the 1997 Period. These nonrecurring items have been included in other
expenses on the statement of operations.
The Company's rent expense increased by $1.7 million from $1.7 million or
43% of net revenues during the 1996 Quarter to $3.4 million or 4.6% of net
revenues during the 1997 Quarter and $3.1 million from $3.4 million or 4.4% of
net revenues during the 1996 Period to $6.5 million or 4.5% of net revenues
during the 1997 Period. Rent expense as a percentage of net revenue varies
depending upon the size of each of the affiliated practice's offices, the number
of satellite offices and the current market rental rate for medical office space
in a particular geographic market.
Medical Facility Development
The Company provides medical facility development services to related and
unrelated third parties in connection with the establishment of health parks,
medical malls and medical office buildings. The Company believes that the
development of such facilities, in certain markets, will aid in the integration
of its affiliated physicians and medical support services and will provide
future opportunities to affiliate with physicians and acquire future physician
practices or support services. Further, the Company believes that the
development of health parks, medical malls and medical office buildings in
certain markets will aid in the integration of its affiliated physicians and
medical support services.
The Company derives its medical facility development service revenues from
the provision of a variety of services. In rendering such services, the Company
generates income without bearing the costs of construction, expending
significant capital or incurring substantial indebtedness. Net revenues from
medical facility development are recognized at the time services are performed.
In some cases fees are earned upon the achievement of certain milestones in the
development process, including the receipt of a building permit and a
certificate of occupancy of the building. Unearned revenue relates to all fees
received in advance of services being completed on development projects.
The Company typically receives the following compensation for its services:
development fees (including management of land acquisition, subdivision, zoning,
surveying, site planning, permitting and building design), general contracting
management fees, leasing and marketing fees, project cost savings income (based
on the difference between total budgeted project costs and actual costs) and
consulting fees.
The amount of development fees and leasing and marketing fees are stated in
the development and marketing agreements. Those agreements also provide the
basis for payment of the fees. The financing fees and consulting fees are
generally not included in specific agreements but are negotiated and disclosed
in project pro formas provided to the owners of the buildings and hospital
clients. Specific agreements usually incorporate those pro formas and provide
that the projects will be developed in conformity therewith. General contracting
management fees and project cost savings income are included in guaranteed
maximum cost contracts entered into
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<PAGE>
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 and the 1997 Period, the Company's medical facility development
generated revenues of $5.2 and $10.4 million, respectively, and pretax income of
$3.3 and $6.5 million, respectively.
Liquidity and Capital Resources
Cash used by operating activities was $1.1 million for the 1997 Period.
Cash used by operating activities was $1.0 million for the 1996 Period. At July
31, 1997, the Company's principal sources of liquidity consisted of working
capital of $94.6 million which included $58.6 million in cash. The Company also
had $24.3 million of current liabilities, including approximately $3.5 million
of indebtedness maturing before July 31, 1998.
Cash used by investing activities was $19.3 million and $9.0 million for
the 1997 Period and 1996 Period, respectively. This primarily represents the
funds required by the Company for the acquisition of physician practices,
medical support services companies, or other medical networks or organizations,
and the advances under notes receivable of $5.3 million, partially offset by the
repayments of notes receivable of $10.0 million during the 1997 Period. In
addition, during the 1997 Period, the Company sold one of its radiation therapy
centers that had been previously closed for $1.5 million.
Cash used by financing activities was $0.9 million for the 1997 Period and
primarily represented the repayment of debt of $1.7 million and the release of
restricted cash collateralizing debt of $0.5 million. Cash provided by financing
activities was $75.6 million for the 1996 Period, which was primarily comprised
of the proceeds (net of offering costs) from the issuance of the Convertible
Subordinated Debentures of $94.8 million and the release of cash collateral of
$1.5 million offset by the repayment of advances from shareholder and other debt
of $15.4 million and $5.5 million, respectively.
During 1996, the Company purchased the stock of a company based in Florida
that provides the managed health care industry with assistance in provider
relations, utilization review and quality assurance. In conjunction with this
acquisition, the Company may be required to make a contingent payment up to a
maximum of $10 million based on the acquired company's earnings before taxes
during the next five years. The payment, if required, shall be paid in cash
and/or Common Stock of the Company.
During July 1997, the Company entered into a management services agreement
to manage a network of over 100 physicians in New York. In connection with this
transaction, the Company has committed to expend up to $40 million to be
utilized for the expansion of the network.
In conjunction with certain of its acquisitions the Company has agreed to
make payments in shares of Common Stock of the Company which are generally
issued one year from the closing date of such acquisitions. The number of shares
to be issued are generally determined based upon the average price of the
Company's Common Stock during the five business days prior to the date of
issuance. As of July 31, 1997, the Company had committed to issue $10.9 million
of Common Stock of the Company using the methodology discussed above.
The Company's acquisition and expansion programs will require substantial
capital resources. In addition, the operation of physician groups, integrated
networks and related medical support services companies, and the development and
implementation of the Company's management information systems, will require
ongoing capital expenditures. The Company expects that its capital needs over
the next several years will substantially exceed capital generated from
operations. To finance its capital needs, the Company plans both to incur
indebtedness and to issue, from time to time, additional debt or equity
securities, including Common Stock or convertible notes, in connection with its
acquisitions and affiliations.
The Company expects that the existing working capital of $94.6 million,
which includes cash of $58.6 million, and amounts to be made available under an
acquisition/working capital line of credit for $100 million which the Company
has obtained a commitment from a bank and anticipates closing during the third
quarter, will be adequate to satisfy the Company's cash requirements for the
next 12 months. However, there can be no
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<PAGE>
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.
Factors to be Considered
The part of this Quarterly Report on Form 10-Q captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contains certain forward-looking statements which involve risks and
uncertainties. Readers should refer to a discussion under "Factors to be
Considered" contained in Part I, Item 1 of the Company's Annual Report on Form
10-K for the year ended January 31, 1997 concerning certain factors that could
cause the Company's actual results to differ materially from the results
anticipated in such forward-looking statements. This discussion is hereby
incorporated by reference into this Quarterly Report.
PART II--OTHER INFORMATION
Item 2. Changes in Securities - Recent Sales of Unregistered Securities
During June 1997, the Company issued 54,500 shares of Common Stock in
connection with its acquisition of the remaining 20% interest in a lithotripsy
company in which the Company acquired an 80% interest during 1994. The shares
were issued to a former stockholder of the acquired company who is currently
employed by the Company. Also during June 1997, the Company issued 100,002
shares of Common Stock in connection with its acquisition of Pinnacle
Associates, Inc. ("Pinnacle") which the Company acquired by merger during 1995.
The sale of such shares was not registered under the Securities Act of 1933, as
amended, in reliance upon Section 4(2) thereof.
The foregoing transactions are further described under "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the issuance of other unregistered shares of Common Stock previously reported as
having been sold also are described under "Notes to Consolidated Financial
Statements."
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", which is
effective for fiscal year 1997. SFAS No. 128 is designed to improve the 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.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 12th day of September, 1997.
PHYMATRIX CORP.
By: /s/ Frederick R. Leathers
--------------------------------------
Chief Financial Officer, Treasurer
and Principal Accounting Officer
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