PROSPECTUS SUPPLEMENT Filed pursuant to Rule 424(b)(3)
To Prospectus Dated September 24, 1997 Registration No. 333-09187
5,000,000 Shares
PhyMatrix Corp.
a Physician Practice Management Company
Common Stock
--------------------
PhyMatrix Corp.'s Prospectus dated September 24, 1997 is hereby
supplemented to include the following:
Effective July 15, 1997, PhyMatrix Corp., a Delaware corporation (the
"Company"), entered into the Amended and Restated Agreement and Plan of Merger
(the "Merger Agreement") by and among the Company, PhyMatrix Acquisition I,
Inc., a Delaware corporation ("PhyMatrix Acquisition"), Clinical Studies Ltd., a
Delaware corporation ("CSL"), Dr. Michael Rothman, Dr. Walter Brown, Michael T.
Heffernan and Ronald Phillips as Trustee of The Alexander Rothman 1993 Qualified
Sub-Chapter S Trust and as Trustee of The Julie Rothman 1993 Qualified
Sub-Chapter S Trust. Pursuant to the Merger Agreement, PhyMatrix Acquisition, a
wholly-owned subsidiary of PhyMatrix, will merge with and into CSL (the
"Acquisition"), and CSL will become a wholly-owned subsidiary of PhyMatrix. CSL
is a site management organization conducting clinical research for
pharmaceutical companies and clinical research organizations at 22 centers
located in 11 states.
PhyMatrix currently anticipates that, subject to the satisfaction of
certain remaining conditions to closing set forth in the Merger Agreement, the
Acquisition will be consummated on or about October 14, 1997. The Acquisition
will be treated for accounting purposes as a pooling of interests.
The purchase price for CSL will be paid to the stockholders of CSL in
shares of PhyMatrix Common Stock. The number of shares of PhyMatrix Common Stock
to be issued in the Acquisition is based upon the average last reported sale
price per share for the five business days preceding the business day prior to
the closing of the Acquisition (the "Last Reported Sale Price"). Based upon the
current market price of PhyMatrix Common Stock (the closing price of PhyMatrix
Common Stock on October 1, 1997 was $15.625), PhyMatrix currently anticipates
that it will issue approximately 5.2 million shares of Common Stock under the
Merger Agreement to the stockholders of CSL. If the Last Reported Sale Price is
less than $13.50 or greater than $16.50, the Merger Agreement provides that the
number of shares to be issued to the stockholders of CSL would increase or
decrease, respectively. If the Last Reported Sale Price is $12.00 or less, each
of PhyMatrix and CSL has the option to terminate the Merger Agreement.
Following the Acquisition, PhyMatrix has agreed to use its best efforts
to register under the Securities Act of 1933, as amended, the resale of the
shares of PhyMatrix Common Stock acquired in the Acquisition.
In connection with the Acquisition, the management of PhyMatrix has
agreed to recommend Michael T. Heffernan, the Chief Executive Officer of CSL,
for election to the Board of Directors of PhyMatrix, and PhyMatrix and Mr.
Heffernan expect to enter into an employment agreement relating to Mr.
Heffernan's continued services as Chief Executive Officer of CSL.
Included as part of this Prospectus Supplement are (i)the Company's
Unaudited Pro Forma Combined Balance Sheet as of July 31, 1997, (ii) the
Company's Unaudited Pro Forma Combined Statements of Operations for the Six
Months ended July 31, 1997, the year ended January 31, 1997 and the years ended
December 31, 1995 and December 31, 1994, respectively, (iii) the audited
combined financial statements of CSL as of and for the years ended December 31,
1996 and December 31, 1995, and (iv) the audited combined financial statements
of CSL as of and for the year ended December 31, 1994.
----------------------
The date of this Prospectus Supplement is October 7, 1997.
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The merger is to be accounted for in accordance with the pooling of interests
method of accounting pursuant to APB Opinion No. 16. The pooling of interests
method of accounting assumes that PhyMatrix Corp. ("PhyMatrix") and Clinical
Studies, Ltd. and Clinical Marketing Ltd. (collectively "CSL") have been merged
since their inception, and the historical consolidated financial statements for
periods prior to consummation of the merger are restated as though the companies
have been combined since January 1, 1994. Accordingly, the accompanying
Unaudited Pro Forma Combined Financial Information gives effect to the
transaction in accordance with pooling of interests accounting.
The following Unaudited Pro Forma Combined Statements of Operations for the six
months ended July 31, 1997 and the years ended December 31, 1994 and 1995 and
January 31, 1997 have been prepared to reflect the merger with CSL as if it had
been completed on January 1, 1994. Adjustments have been made as described to
record income tax expense on CSL's historical Statements of Operations. The
Unaudited Pro Forma Combined Balance Sheet at July 31, 1997 gives effect to the
merger with CSL as if such merger had occurred on July 31, 1997.
The Unaudited Pro Forma Combined Financial Information has been prepared based
on the audited and unaudited historical financial statements of PhyMatrix and
CSL, which statements are included herein. The Unaudited Pro Forma Combined
Financial Information is not indicative of the results that would have occurred
if the acquisition of CSL had occurred on the dates indicated or which may be
realized in the future.
The Unaudited Pro Forma Combined Financial Information should be read in
conjunction with (i) PhyMatrix' consolidated historical financial statements and
related notes contained in the annual, quarterly and other reports filed by
PhyMatrix with the Securities and Exchange Commission, (ii) CSL's audited
historical combined financial statements for the years ended December 31, 1994,
1995 and 1996, and (iii) CSL's unaudited historical combined financial
statements for the six months ended July 31, 1997.
The Unaudited Pro Forma Combined Financial Information has been prepared in
accordance with generally accepted accounting principles. These principles
require management to make extensive use of estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
Unaudited Pro Forma Combined Statements of Operations are not necessarily
indicative of future operating results.
<PAGE>
PRO FORMA COMBINED BALANCE SHEETS
As of July 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
PhyMatrix Clinical Pro Forma
Corp. Studies Adjustments Combined
----- ------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 58,638,326 $ 744,772 $ (10,150,000)(A) $ 49,233,098
Receivables:
Accounts receivable, net of allowances 48,949,768 7,631,640 56,581,408
Other receivables 3,440,009 - 3,440,009
Notes receivable 2,364,537 - 2,364,537
Prepaid expenses and other current assets 5,538,993 - - 5,538,993
--------- --------- --------- -----------
Total current assets 118,931,633 8,376,412 (10,150,000) 117,158,045
Property, plant and equipment, net 40,214,895 631,317 40,846,212
Notes receivable 7,884,700 - 7,884,700
Goodwill, net 84,355,699 7,708,913 92,064,612
Management service agreements, net 56,078,028 - 56,078,028
Investment in affiliates 3,517,934 - 3,517,934
Other assets (including restricted cash) 12,400,247 200,293 - 12,600,540
--------- --------- --------- -----------
$323,383,136 $16,916,935 $ (10,150,000) $ 330,150,071
Total assets ========= =========== ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of debt and capital leases $ 3,522,190 $ 87,091 $ 3,609,281
Accounts payable 7,449,454 664,297 8,113,751
Accrued compensation 1,002,940 417,882 1,420,822
Accrued and other current liabilities 12,353,045 1,603,125 478,000 (B) 14,434,170
--------- --------- --------- -----------
Total current liabilities 24,327,629 2,772,395 478,000 27,578,024
Long-term debt and capital leases, less current
portion 7,863,224 9,019,191 16,882,415
Convertible subordinated debentures 100,000,000 - 100,000,000
Other long term liabilities 11,759,706 - 11,759,706
Deferred tax liability - -
Minority interest 1,854,455 - - 1,854,455
--------- --------- --------- -----------
Total liabilities 145,805,014 11,791,586 478,000 158,074,600
Commitments and contingencies
Shareholders' equity:
Common stock 239,269 627,940 867,209
Additional paid in capital 169,160,700 120,000 169,280,700
Retained earnings 8,178,153 4,377,409 (10,628,000)(A)(B) 1,927,562
--------- --------- --------- -----------
Total shareholders' equity 177,578,122 5,125,349 (10,628,000) 172,075,471
--------- --------- --------- -----------
Total liabilities and shareholders' equity $323,383,136 $16,916,935 $ (10,150,000) $ 330,150,071
============ =========== ============ ===========
</TABLE>
<PAGE>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
Six Months Ended July 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Clinical Pro Forma
PhyMatrix Studies Adjustments Combined
--------- ------- ----------- ---------
(C) (D)
<S> <C> <C> <C> <C>
Net revenues from services $ 69,961,529 $13,128,176 $ 83,089,705
Net revenue from management service agreements 75,685,223 - - 75,685,223
----------- ----------- ----------- -------------
Total revenue 145,646,752 13,128,176 - 158,774,928
----------- ----------- ----------- -------------
Operating costs and administrative expenses:
Cost of affiliated physician management services 33,534,991 - 33,534,991
Salaries, wages and benefits 33,811,558 5,320,912 39,132,470
Professional fees 3,140,177 1,114,546 4,254,723
Supplies 19,719,512 180,932 19,900,444
Utilities 1,877,154 230,295 2,107,449
Depreciation and amortization 4,533,310 323,684 4,856,994
Rent 6,521,290 635,456 7,156,746
Other 28,797,025 4,401,509 - 33,198,534 (E)
Total operating costs and ----------- ----------- ----------- -------------
administrative expenses 131,935,017 12,207,334 - 144,142,351
----------- ----------- ----------- -------------
Operating income 13,711,735 920,842 - 14,632,577
-
Interest expense, net 1,382,600 291,363 1,673,963
Income from investment in affiliates (412,985) - - (412,985)
----------- ----------- ----------- -------------
Income before provision for income taxes 12,742,120 629,479 - 13,371,599
Income tax expense 4,545,904 - 251,792 (F) 4,797,696
----------- ----------- ----------- -------------
Net income (loss) $ 8,196,216 $ 629,479 $(251,792) $ 8,573,903
=========== =========== =========== =============
Net income per weighted average share $ 0.34 $ 0.29
----------- ------------
Weighted average number of shares outstanding (I) 23,863,289 29,108,722
=========== =============
</TABLE>
<PAGE>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Clinical Combined
PhyMatrix Studies Pro Forma
Year Ended Year Ended Year Ended
January 31, December 31, January 31,
1997 1996 Adjustments 1997
--------- ------- ----------- ---------
(C) (D)
<S> <C> <C> <C> <C>
Net revenues from services $ 99,773,277 $ 18,040,124 $ 117,813,401
Net revenue from management service agreements 90,187,458 - - 90,187,458
---------- ---------- ---------- ----------
Total revenue 189,960,735 18,040,124 - 208,000,859
---------- ---------- ---------- ----------
Operating costs and administrative expenses:
Cost of affiliated physician management services 42,245,211 - 42,245,211
Salaries, wages and benefits 52,313,062 6,037,786 58,350,848 (E)
Professional fees 4,119,161 3,202,688 7,321,849 (E)
Supplies 26,939,628 263,277 27,202,905
Utilities 2,562,328 306,156 2,868,484
Depreciation and amortization 7,144,588 237,875 7,382,463
Rent 7,653,298 865,514 8,518,812
Provision for bad debt 4,607,888 - 4,607,888
Other 22,534,066 3,824,996 - 26,359,062 (E)
---------- ---------- ---------- ----------
Total operating costs and
administrative expenses 170,119,230 14,738,292 - 184,857,522
---------- ---------- ---------- ----------
Operating income 19,841,505 3,301,832 23,143,337
Interest expense, net 1,288,837 68,373 1,357,210
Interest expense, shareholder 369,366 - 369,366
Income from investment in affiliates (709,295) - - (709,295)
---------- ---------- ---------- ----------
Income before provision for income taxes 18,892,597 3,233,459 22,126,056
Income tax expense 6,836,066 - 1,293,385 (F) 8,129,451
---------- ---------- ---------- ----------
-
Net income (loss) $ 12,056,531 $ 3,233,459 $(1,293,385) $ 13,996,605
=========== ========== ========== ==========
Net income per weighted average share $ 0.54 $ 0.50
----------- ==========
Weighted average number of shares outstanding (I) 22,511,448 27,756,881
=========== ==========
</TABLE>
<PAGE>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
Year Ended December 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
Clinical Combined
PhyMatrix Studies Pro Forma
--------- ------- ---------
(C) (D)
<S> <C> <C> <C>
Net revenues from services $ 48,360,716 $ 13,351,843 $ 61,712,559
Net revenue from management service agreements 22,372,566 - 22,372,566
----------- ----------- ----------
Total revenue 70,733,282 13,351,843 84,085,125
----------- ----------- ----------
Operating costs and administrative expenses:
Cost of affiliated physician management services 9,655,973 - 9,655,973
Salaries, wages and benefits 29,708,554 3,832,215 33,540,769
Salaries, wages and benefits - related party 2,267,891 - 2,267,891
Professional fees 2,571,459 1,895,438 4,466,897 (E)
Professional fees - related party 273,941 - 273,941
Supplies 11,864,514 252,848 12,117,362
Utilities 1,307,564 191,191 1,498,755
Depreciation and amortization 3,862,519 92,992 3,955,511
Rent 4,043,465 598,679 4,642,144
Rent - related party 459,732 - 459,732
Earnout payment 1,271,000 - 1,271,000
Provision for closure loss 2,500,000 - 2,500,000
Provision for bad debt 744,111 - 744,111
Other 5,409,676 3,581,276 8,990,952 (E)
Other - related party 728,116 - 728,116
----------- ----------- ----------
Total operating costs and
administrative expenses 76,668,515 10,444,639 87,113,154
----------- ----------- ----------
Operating income (loss) (5,935,233) 2,907,204 (3,028,029)
-
Interest expense, net 3,144,027 (23,971) 3,120,056
Interest expense, shareholder 1,708,174 - 1,708,174
Minority interest 806,637 - 806,637
Income from investment in affiliates (569,156) - (569,156)
----------- ----------- ----------
Income (loss) before provision for income taxes (11,024,915) 2,931,175 (8,093,740)
Income tax expense (G) - - -
----------- ----------- ----------
-
Net income (loss)(H) $(11,024,915) $ 2,931,175 $ (8,093,740)
============ ========== ===========
</TABLE>
<PAGE>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
Year Ended December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
Clinical Pro Forma
PhyMatrix Studies Combined
---------- ---------- ---------
(C) (D)
<S> <C> <C> <C>
Net revenues from services $2,446,821 $4,921,285 $7,368,106
Net revenue from management service agreements - - -
---------- ---------- ----------
Total revenue 2,446,821 4,921,285 7,368,106
---------- ---------- ----------
Operating costs and administrative expenses:
Cost of affiliated physician management services - -
Salaries, wages and benefits 1,207,750 1,813,752 3,021,502
Salaries, wages and benefits - related party 934,200 - 934,200
Professional fees 58,665 815,747 874,412(E)
Professional fees - related party 253,995 - 253,995
Supplies 404,911 278,045 682,956
Utilities 77,416 124,223 201,639
Depreciation and amortization 107,387 58,851 166,238
Rent 56,244 305,647 361,891
Rent - related party 192,242 - 192,242
Other 53,665 1,623,017 1,676,682(E)
Other - related party 249,316 - 249,316
---------- --------- ---------
Total operating costs and administrative expenses 3,595,791 5,019,282 8,615,073
---------- --------- ---------
Operating loss (1,148,970) (97,997) (1,246,967)
-
Interest expense, net 95,069 705 95,774
Minority interest 52,698 - 52,698
---------- --------- ---------
Loss before provision for income taxes (1,296,737) (98,702) (1,395,439)
Income tax expense (G) - - -
---------- --------- ---------
Net loss (H)
$(1,296,737) $(98,702) $(1,395,439)
=========== ========= ===========
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
A. To record estimated transaction expenses and the one-time costs to buy out
a consulting contract as shown below:
<TABLE>
<CAPTION>
Clinical
Studies PhyMatrix Total
------------------ ------------------- --------------------
<S> <C> <C> <C>
Legal $ 200,000 $300,000 $ 500,000
Accounting 200,000 175,000 375,000
Investment Banking 3,600,000 325,000 3,925,000
Other 250,000 100,000 350,000
------------------ ------------------- --------------------
Subtotal transaction expenses 4,250,000 900,000 5,150,000
------------------ ------------------- --------------------
CNS Consulting (1) 5,000,000 0 5,000,000
================== =================== ====================
Total $9,250,000 $900,000 $10,150,000
================== =================== ====================
</TABLE>
(1) Represents buyout of consulting contract.
NOTE: The transaction will be accounted for using the pooling of interests
method of accounting and, therefore, these transaction expenses and the
one-time costs to buy out a consulting contract will be recorded as a
one-time charge on PhyMatrix' Statement of Operations during the
quarter in which the transaction closes.
B. Represents the estimated remaining dividends to be paid in connection with
CSL's shareholders' S corporation tax liability for the period ended July
31, 1997.
C. Derived from the audited combined statements of operations of PhyMatrix for
the period from June 24, 1994 (inception) to December 31, 1994 and the year
ended December 31, 1995 and the audited consolidated statement of
operations for the year ended January 31,1997, and the unaudited six months
ended July 31, 1997. In January 1996, the Company changed its fiscal year
end from December 31, to January 31.
D. Derived from the audited combined statements of operations of CSL for the
years ended December 31, 1994, 1995 and 1996, including certain
reclassifications to conform to the PhyMatrix presentation and the
unaudited six months ended July 31, 1997. The audited combined financial
statements of CSL for the years ended December 31, 1994, 1995 and 1996 are
attached as Annex D.
<PAGE>
E. The following items reflect noncontinuing charges incurred by CSL during
the respective periods:
<TABLE>
<CAPTION>
Six
Months
Year Ended Ended
------------------------------------------------------
December 31, December 31, December 31, July 31,
1994 1995 1996 1997
--------------- -------------- --------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Salaries expense related to the equity interest $ - $ - $ 628,000 $ -
granted to an officer of CSL. During January
1997, the officer entered into an employment
agreement with no provisions for sharing of profits
or proceeds.
Consulting fees based on a profit sharing 120,000 433,000 314,000 -
arrangement. The profit sharing arrangement was
terminated during 1997.
Management fees paid to the principal shareholders 802,000 1,700,000 987,000 907,000
of CSL
--------------- -------------- --------------- -------------
Total nonrecurring items 922,000 2,133,000 1,929,000 907,000
After tax impact of nonrecurring items 922,000 2,133,000 1,157,400 544,200
PhyMatrix pro forma net income (loss) (1,395,439) (8,093,740) 13,996,605(1) 8,573,903
PhyMatrix pro forma net income (loss) adjusted for $ (473,439) $(5,960,740) $15,154,005 $9,118,103
nonrecurring items
PhyMatrix pro forma EPS adjusted for nonrecurring - - $0.55 $0.31
items(I)
</TABLE>
(1) Represents the PhyMatrix pro forma net income
for the year ended January 31, 1997.
F. Represents an adjustment of $1,293,385 and $251,792 during the year ended
January 31, 1997 and the six months ended July 31, 1997 for income taxes on
the adjusted CSL net income at an estimated tax rate of 40%. No income
taxes were provided in the historical financial statements of CSL because
CSL had elected to be treated as an S Corp.
G. Provisions for income taxes have not been reflected for the years ended
December 31, 1994 and 1995 because there is no taxable income on a combined
basis.
H. Prior to January 23, 1996 (date of PhyMatrix' initial public offering),
there were no outstanding shares of Common Stock and, accordingly, no
earnings per share.
I. Pro forma combined weighted average number of shares outstanding includes
5,245,433 shares estimated to be issued to the stockholders of CSL
pursuant to the merger. The actual shares to be issued will be determined
based on the average closing price of the Common Stock for the five
business days prior to the merger.
<PAGE>
[LETTERHEAD] Clinical Studies Ltd.
[LOGO Deloitte & Touche LLP] And Clinical Marketing Ltd.
Combined Financial Statements for the
Years Ended December 31, 1996 and 1995
and Independent Auditors' Report
- ---------------
Deloitte Touche
Tohmatsu
International
- -------------
<PAGE>
CLINICAL STUDIES LTD.
AND CLINICAL MARKETING LTD.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT 1
COMBINED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995:
Combined Balance Sheets 2
Combined Statements of Operations 3
Combined Statements of Stockholders' Equity 4
Combined Statements of Cash Flows 5
Notes to Combined Financial Statements 6-15
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
[LETTERHEAD] -----------------------------------------------------------------------------------------------
[LOGO Deloitte & Touche LLP] 125 Summer Street Telephone: (617) 261-8000
Boston, Massachusetts 02110-1617 Facsimile: (617) 261-8111
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Clinical Studies Ltd. And Clinical Marketing Ltd.
Providence, RI
We have audited the accompanying combined balance sheets of Clinical Studies
Ltd. ("CSL") and Clinical Marketing Ltd. ("CML") (collectively the "Companies")
as of December 31, 1996 and 1995, and the related combined statements of
operations, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the combined financial position of Clinical Studies Ltd. and
Clinical Marketing Ltd. as of December 31, 1996 and 1995, and the results of
their combined operations and their combined cash flows for the years then ended
in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
May 28, 1997
- ---------------
Deloitte Touche
Tohmatsu
International
- -------------
<PAGE>
CLINICAL STUDIES LTD. AND CLINICAL MARKETING LTD.
COMBINED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
ASSETS 1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,428,276 $3,595,454
Contract receivables (net of allowance for contract
adjustments of $278,000 and $236,000 in 1996
and 1995, respectively) 5,897,469 2,210,028
----------- ----------
Total current assets 7,325,745 5,805,482
----------- ----------
PROPERTY AND EQUIPMENT:
Furniture and office equipment 407,892 255,425
Medical equipment 343,138 285,249
Vehicles 12,758 12,758
----------- ----------
Total 763,788 553,432
Less accumulated depreciation and amortization (302,019) (178,669)
----------- ----------
Property and equipment, net 461,769 374,763
----------- ----------
INTANGIBLE ASSETS, Net 7,257,298 --
----------- ----------
OTHER ASSETS 141,546 99,949
----------- ----------
TOTAL $15,186,358 $6,280,194
=========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 90,069 $ 44,581
Accounts payable and accrued expenses 1,707,955 1,432,086
Deferred revenue 1,182,224 1,940,180
----------- ----------
Total current liabilities 2,980,248 3,416,847
----------- ----------
LONG-TERM DEBT-Less current portion 7,317,740 104,484
----------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock: Clinical Studies Limited, no par value-
authorized, 1,000 shares; issued
and outstanding, 100 shares 100 100
Clinical Marketing Limited, no par value-
authorized, 8,000 shares; issued
and outstanding, 235 shares in 1996 and
200 shares in 1995 627,840 200
Additional paid-in capital 120,000 120,000
Retained earnings 4,140,430 2,638,563
----------- ----------
Total stockholders' equity 4,888,370 2,758,863
----------- ----------
TOTAL $15,186,358 $6,280,194
=========== ==========
</TABLE>
See notes to combined financial statements.
-2-
<PAGE>
CLINICAL STUDIES LTD. AND CLINICAL MARKETING LTD.
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
REVENUE $18,040,124 $13,351,843
OPERATING EXPENSES 14,738,292 10,444,639
----------- -----------
INCOME FROM OPERATIONS 3,301,832 2,907,204
----------- -----------
OTHER INCOME (EXPENSE):
Interest income 75,833 42,242
Interest expense (144,206) (18,271)
----------- -----------
Total other income (expense) (68,373) 23,971
----------- -----------
NET INCOME $ 3,233,459 $ 2,931,175
=========== ===========
</TABLE>
See notes to combined financial statements.
-3-
<PAGE>
CLINICAL STUDIES LTD. AND CLINICAL MARKETING LTD.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CSL CML
No Par No Par
Value Value Additional Retained Total
CSL Common CML Common Paid-in Earnings Stockholders'
Shares Stock Shares Stock Capital (Deficit) Equity
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 100 $100 -- $ -- $120,000 $ (72,612) $ 47,488
Issuance of common stock -- -- 200 200 -- -- 200
Net income -- -- -- -- -- 2,931,175 2,931,175
Dividends -- -- -- -- -- (220,000) (220,000)
--- --- --- -------- -------- ---------- ---------
BALANCE, DECEMBER 31, 1995 100 100 200 200 120,000 2,638,563 2,758,863
Issuance of common stock (see Note 5) -- -- 35 627,640 -- -- 627,640
Net income -- -- -- -- -- 3,233,459 3,233,459
Dividends -- -- -- -- -- (1,731,592) (1,731,592)
--- --- --- -------- -------- ---------- ---------
BALANCE, DECEMBER 31, 1996 100 $100 235 $627,840 $120,000 $4,140,430 $4,888,370
=== ==== === ======== ======== ========== ==========
</TABLE>
See notes to combined financial statements.
-4-
<PAGE>
CLINICAL STUDIES LTD. AND CLINICAL MARKETING LTD.
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,233,459 $ 2,931,175
Adjustments to reconcile net income to net cash (used for) provided by
operating activities:
Depreciation and amortization 237,078 92,992
Issuance of common stock as compensation 627,640 --
Increase (decrease) in cash from:
Contract receivables (3,687,441) (1,995,853)
Other assets (41,597) (86,016)
Accounts payable and accrued expenses 275,869 1,131,453
Deferred revenue (757,956) 1,882,780
----------- -----------
Net cash (used for) provided by operating activities (112,948) 3,956,531
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Amount paid for acquired operations (3,200,000) --
Purchase of equipment, net (210,356) (211,400)
----------- -----------
Net cash used for investing activities (3,410,356) (211,400)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving bank line-of-credit, net 3,132,300 --
Payments on:
Note payable (2,750) (1,144)
Obligations under capital leases (41,832) (36,135)
Dividends to stockholders (1,731,592) (220,000)
Issuance of common stock ` -- 200
----------- -----------
Net cash provided by (used for) financing activities 1,356,126 (257,079)
----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,167,178) 3,488,052
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,595,454 107,402
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,428,276 $ 3,595,454
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION-Interest payments $ 121,082 $ 18,000
=========== ===========
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
CSL issued $3,950,000 of notes payable in 1996 in connection with
acquisitions. CSL accrued $221,025 of contingent payments in 1996 in
connection with acquisitions. CML issued 35 shares of common stock as
compensation in 1996 at a value of $627,640
</TABLE>
See notes to combined financial statements.
-5-
<PAGE>
CLINICAL STUDIES LTD. AND CLINICAL MARKETING LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESSES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Businesses-Clinical Studies Ltd. ("CSL") performs clinical
research studies sponsored by pharmaceutical companies and managed by
contract research organizations. CSL enrolls patients, administers
medications and submits data to sponsors for analysis. CSL operates in Rhode
Island, Massachusetts, Florida, Arizona and Pennsylvania.
Clinical Marketing Ltd. ("CML"), which began operations on September 1,
1995, provides advertising and mixed media promotion services, primarily for
CSL.
CSL and CML have common owners.
Principles of Combination-The combined financial statements include the
accounts of CSL and CML (collectively the "Companies"). All significant
intercompany accounts and transactions are eliminated in combination.
Property and Equipment-Property and equipment are recorded at cost. Capital
lease property and equipment is recorded at the lower of fair market value
at the inception of the lease or the present value of the minimum lease
payments required. Depreciation and amortization are provided using the
straight-line method over the estimated useful lives of the related assets
or, in the case of capital lease property and equipment and leasehold
improvements, over the lesser of the life of the lease or the estimated
useful life of the asset, as follows:
Life
Furniture and office equipment 5 years
Medical equipment 5 years
Vehicles 4 years
Intangible Assets-Intangible assets consist primarily of goodwill,
noncompete agreements and trained workforces acquired in the purchase of
clinical site operations during 1996. The purchase price in excess of net
assets acquired (goodwill) is amortized on a straight-line basis over twenty
years. The Company evaluates the carrying value of goodwill based upon
current and anticipated net income and undiscounted cash flows, and
recognizes an impairment when it is probable that such estimated future net
income and/or cash flows will be less than the carrying value of goodwill.
Measurement of the amount of impairment, if any, is based upon the
difference between carrying value and fair value. The costs allocated to
noncompete agreements and the trained workforces are amortized on a
straight-line basis over five and three years, respectively. Accumulated
amortization amounted to approximately $114,000 for all intangible assets at
December 31, 1996. There were no intangible assets recorded through 1995.
-6-
<PAGE>
1. NATURE OF BUSINESSES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Income Taxes-The Companies, with the consent of their stockholders, have
elected to be treated as S Corporations as provided under the Internal
Revenue Code (the "Code"), whereby income taxes are the responsibility of
the stockholders. Accordingly, the Companies' combined statements of
operations do not include provisions for income taxes. Dividends are
primarily intended to reimburse stockholders for income tax liabilities
incurred.
Revenue Recognition-CSL generates revenue based on contracts to perform
clinical studies. Generally, these contracts specify the fees to be received
as services are provided to patients enrolled in the studies. Revenues are
recognized as patient visits are conducted and such services are provided.
Costs related to the studies are expensed as incurred. Payments received
prior to providing services are recorded as deferred revenue.
CML generates revenue, primarily from CSL, based upon reimbursement of
actual advertising and marketing expenses incurred plus a markup. Such
revenue is eliminated in the combined financial statements.
Cash and Cash Equivalents-Cash and cash equivalents include demand deposits
held at financial institutions and short-term investments purchased with
remaining maturities of three months or less.
Use of Estimates-Preparation of the Companies' 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
balance sheet dates. The primary estimates underlying the Companies'
combined financial statements include allowances for contract adjustments,
deferred revenue, useful lives of long-lived assets and the amount of future
earnings of acquisitions having contingent earnouts payable. Management
bases its estimates on certain assumptions, which they believe are
reasonable in the circumstances, and while actual results could differ from
those estimates, management does not believe that changes in those
assumptions in the near term would have a material effect on the Companies'
combined financial position or results of operations.
During 1996, the Companies revised their estimate of future employee
benefits. Based on an analysis of actual employee activities, management
revised their estimate of accrued nonvesting sick-pay benefits. The revision
resulted in an increase in net income for the year ended December 31, 1996
of approximately $190,000.
Risks and Uncertainties-The Companies' businesses could be impacted by the
failure of key customers, increasing competition in the pharmaceutical drug
testing industry, federal and state legislation in the area of
pharmaceutical drug testing and the departure of key trial investigators.
Also, for a number of clinical trial programs, the Companies believe that
industry protocols have resulted in final settlement of contract receivables
being prolonged due to delays in the finalization of the testing program and
data analysis. Changes in these areas could adversely impact the Companies'
operations in the future.
-7-
<PAGE>
1. NATURE OF BUSINESSES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Business and Credit Concentrations-The Companies are involved in the
performance of clinical research trials for pharmaceutical companies and
contract research organizations. Credit is granted without collateral to
these customers. During the year ended December 31, 1996, revenue from three
customers represented 21%, 12% and 11% of combined revenue. During the year
ended December 31, 1995, revenue from one customer represented 35% of
combined revenue. The Companies' largest ten customers accounted for 65% of
total accounts receivable at December 31, 1996, of which two customer
balances represented 14% and 13%. No other customer balances exceeded 10% of
total accounts receivable at December 31, 1996.
Accounting Pronouncements--Effective January 1, 1996, the Companies adopted
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," and SFAS No. 123, "Accounting for Stock-Based Compensation."
In accordance with the provisions of SFAS No. 123, the Companies elected to
account for stock-based compensation under the provisions of APB 25. The
adoption of SFAS Nos. 121 and 123 did not have a material impact on the
Companies' combined financial statements.
2. CONTRACT RECEIVABLES
Contract receivables consisted of the following at December 31:
1996 1995
Contracts in progress:
Billed $ 678,445 $ --
Unbilled 5,497,024 2,446,028
Less: allowance for contract adjustments (278,000) (236,000)
---------- -----------
$5,897,469 $2,210,028
========== ===========
Substantially all of the Companies' contracts are subject to final
adjustment upon close-out of the contracts with customers. Management
estimates that such adjustments, if any, will not be materially different
than the allowance recorded.
-8-
<PAGE>
3. LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
1996 1995
Revolving bank line-of-credit $3,132,300 $ --
Acquisition notes payable 3,950,000 --
Acquisition earnouts payable 221,025 --
Other note payable 8,203 10,953
Capital lease obligations 96,281 138,112
---------- -----------
Total 7,407,809 149,065
Less current portion 90,069 44,581
---------- -----------
Long-term portion $7,317,740 $ 104,484
========== ===========
Revolving Bank Line-of-Credit-On October 1, 1996, CSL entered into a
$5,000,000 revolving line-of-credit agreement with a bank. Interest, payable
monthly, is computed at 1/4% above the bank's base rate (7.86% at
December 31, 1996). Such agreement is collateralized by a security interest
in all assets and the stock of both CSL and CML. The agreement expires on
September 30, 1999. In connection with this line-of-credit agreement, CSL is
subject to certain restrictive loan covenants, which provide for, among
other things, the maintenance of certain financial ratios. The most
restrictive financial covenants are the requirement to combined net income
of $100,000 per quarter and maintain a minimum net worth of $2.45 million at
all times.
Acquisition Notes Payable-In connection with the acquisitions during 1996
(see Note 8), CSL issued uncollateralized promissory notes with maturity
dates as follows:
Amount Due Date
$ 250,000 January 1, 1998
500,000 January 1, 1999
1,000,000 November 2, 1999
2,000,000 October 3, 2001
100,000 August 31, 2001
100,000 August 31, 2000
Interest on all acquisition notes payable is paid quarterly in arrears at an
annual interest rate of 7%.
In the event of a public offering of its shares by the Companies, these
notes are convertible into common stock at the option of the note holders.
-9-
<PAGE>
3. LONG-TERM DEBT (CONTINUED)
Acquisition Earnouts Payable-In connection with one of the business
acquisitions in 1996 (see Note 8), minimum earnout payments of $221,025 were
established in the purchase agreement and have been accrued in the
accompanying combined financial statements. These minimum payments are due
as follows:
Year Amount
1997 $ 40,000
1998 42,000
1999 44,100
2000 46,305
2001 48,620
--------
Total $221,025
========
Other Note Payable-CSL has a note payable, collateralized by a vehicle, with
a financing company. Such note requires monthly payments of approximately
$300 for principal and interest through September 1999 and is collateralized
by the vehicle.
Scheduled maturities of the note payable at December 31, 1996 are as
follows:
Year Amount
1997 $2,978
1998 3,225
1999 2,000
------
Total $8,203
======
-10-
<PAGE>
3. LONG-TERM DEBT (CONTINUED)
Capital Leases-CSL leases certain equipment under capital leases. At
December 31, 1996 and 1995 the cost of this equipment was $210,000.
Accumulated amortization at December 31, 1996 and 1995 was approximately
$126,000 and $84,000, respectively. The future minimum lease payments under
the capital leases, together with the present value of the net minimum lease
payments as of December 31, 1996, are as follows:
Year Amount
1997 $ 55,943
1998 47,974
1999 2,811
2000 1,727
--------
Net minimum lease payments 108,455
Less amount representing interest 12,174
--------
Present value of net minimum lease payments 96,281
Less current portion 47,091
--------
Long-term portion of obligation under capital lease $ 49,190
========
4. EMPLOYEE BENEFIT PLAN
The Companies participate in a profit-sharing plan (the "plan") for all
employees which qualifies under Section 401(k) of the Code. The plan covers
all employees who have completed six months of service and have atttained
age twenty-one. The Companies allow eligible employees to contribute up to
15% of their compensation and the Companies may match up to 20% of the
employees' first 5% of covered compensation. The Companies may elect to make
additional contributions at the discretion of the Board of Directors. The
Companies made contributions to the plan of approximately $14,500 and
$34,000 for the years ended December 31, 1996 and 1995, respectively.
5. RELATED-PARTY TRANSACTIONS
Included in operating expenses are discretionary management fees paid or
accrued to the principal shareholders of CSL for management-related
services. Approximately $987,000 and $1,700,000 of such management fees were
incurred for the years ended December 31, 1996 and 1995, respectively, and
are included in operating expenses.
A key officer of CSL entered into an employment agreement with CSL, dated
January 1995, which entitled him to additional compensation of 5.5% of
annual net profits and, in the event of an IPO or sale of CSL, 5% of the
proceeds from any such transaction.
-11-
<PAGE>
5. RELATED-PARTY TRANSACTIONS (CONTINUED)
In June of 1996, the principal shareholders in CSL decided to formalize
their arrangement with this officer as to his equity participation in the
business. To effect this decision, the employee was granted a 15% equity
interest in CML, which was merged into CSL effective January 1, 1997. Based
on an independent appraisal, the Company valued the transaction at $627,640
and recorded the amount as a 1996 operating expense. On January 1, 1997, the
officer entered into a new employment agreement with CSL, with no provisions
as to the sharing of profits, or proceeds, in the event of an IPO or sale of
CSL.
6. COMMITMENTS
Operating Leases-The Companies lease office space under renewable operating
leases expiring through the year 2004. Such operating leases require the
payment of monthly rent and certain operating expenses.
As of December 31, 1996, the lease agreements require approximate annual
lease payments as follows:
Year Amount
1997 $1,113,000
1998 1,203,000
1999 1,153,000
2000 827,000
2001 472,000
Thereafter 318,000
----------
Total $5,086,000
==========
Total rent expense was approximately $820,000 and $598,000 for the years
ended December 31, 1996 and 1995, respectively.
7. PROFIT-SHARING AGREEMENT
CSL has a profit-sharing agreement with a consultant to the Company. Such
agreement provides for payments to be made to the individual based on 10% of
income of the sites in existence at June 15, 1996, before taxes and certain
management fees paid to officers of CSL, for the year. Amounts charged to
expenses related to such agreements totaled approximately $314,000 and
$433,000 for 1996 and 1995, respectively (see Note 10).
Under the same agreement, in the event that a majority interest in the
common stock of CSL is sold by CSL's stockholders, CSL is obligated to pay
to the former consultant an amount up to a combined total of 10% of the
consideration received by the stockholders.
-12-
<PAGE>
8. ACQUISITIONS
All acquisitions have been accounted for using the purchase method of
accounting, and operations of the acquired businesses have been included in
the accompanying combined financial statements from their respective dates
of acquisition. The excess of purchase price over the fair value of the net
assets acquired is allocated to goodwill, noncompete covenants and trained
workforces. Most purchase agreements provide for contingent payments based
on targeted annual income of the acquired business, for a period of up to
five years. Any such future payments are generally capitalized as goodwill
when paid.
On August 31, 1996, CSL acquired the business and certain assets of a single
site clinical research company in Sarasota, Florida for $300,000 plus
contingent consideration based on profitability measures over the next five
years. The purchase price consisted of $100,000 of cash and the issuance of
two subordinated promissory notes of $100,000 each. The contingent payments
will equal 15% of the increase in adjusted income before tax, of the
acquired business, over the prior year's amount. In no event shall the
contingent payments be less than $221,025. The full amount of the minimum
payments was accrued for at the date of the acquisition.
On October 4, 1996, CSL acquired the business and certain assets of a
multi-site clinical research company in Pennsylvania for $6,850,000 plus
contingent consideration based on profitability measures over the next five
years. The purchase price consisted of $3,100,000 of cash and the issuance
of two subordinated promissory notes of $2,000,000 and $1,750,000,
respectively. The contingent payments will equal 15% of the excess of
adjusted income before tax over $2,000,000 per year for five years and, in
the case of an initial public offering of the Companies' stock, $750,000 of
such stock.
The cost of the acquisitions was preliminarily allocated on the basis of the
estimated fair value of the assets acquired and the liabilities assumed.
This allocation resulted in goodwill of $6,966,000, noncompete agreements of
$355,000 and trained workforces of $50,000.
9. STOCK OPTIONS
In 1996, the Board of Directors of CSL (the "Board") adopted the 1996 Equity
Incentive Plan, under which incentive and nonqualified options to purchase
up to 10 shares of CSL's common stock may be granted over a ten-year period
to directors, officers, employees and consultants. All option grants, prices
and vesting periods are determined by the Board. Incentive stock options may
be granted at a price not less than fair market value on the date of grant,
as determined by the Board.
-13-
<PAGE>
9. STOCK OPTIONS (CONTINUED)
A summary of stock option activity is as follows:
Weighted
Number Average
of Exercise
Options Price
Outstanding at December 31, 1995 -- $ --
Granted 2.31 147,597
-------- --------
Outstanding at December 31, 1996 2.31 147,597
-------- --------
Exercisable at December 31, 1996 $0.634 $147,597
======== ========
The following table sets forth information regarding options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Exercisable
-------------------------
Options Outstanding Weighted
- --------------------------------------------------------- Average
Weighted Weighted Exercise
Average Average Number Price for
Number of Exercise Remaining Exercise Currently Currently
Options Price Life Price Exercisable Exercisable
<S> <C> <C> <C> <C> <C>
2.31 $147,597 9 years $147,597 0.634 $147,597
</TABLE>
CSL uses the intrinsic value method to measure compensation expense
associated with grants of stock options to employees. Because the option
exercise price significantly exceeds the estimated fair value of the
Company's stock at the grant date, the weighted average fair value of
options granted in 1996 was $0. Accordingly, had CSL used the fair value
method to measure compensation, reported net income (before distributions)
would not have changed for 1996.
The fair value of options on their grant date was measured using the
Black-Scholes option pricing model. Key assumptions used to apply this
pricing model are as follows:
1996
Risk-free interest rate 5.5%
Expected life of option grants 10 years
Expected volatility of underlying stock --
Expected dividend payment rate, as a percentage of the stock
price on the date of grant --
The option pricing model used was designed to value readily tradeable stock
options with relatively short lives. The options granted to employees are
not tradeable and have contractual lives of up to ten years. However,
management believes that the assumptions used to value the options and the
model applied yield a reasonable estimate of the fair value of the grants
made under the circumstances.
-14-
<PAGE>
10. SUBSEQUENT EVENTS
On January 1, 1997, CSL and CML merged operations into one Delaware
Subchapter S Corporation, also named Clinical Studies Ltd. Each share of CSL
and CML was converted to 5,324.53 shares and 1,562.27 shares, respectively,
of the new entity.
On March 12, 1997, the shareholders of CSL signed a letter of intent to
exchange the stock of CSL for stock of PhyMatrix Corp. ("PhyMatrix"), a
publicly traded company. The purchase price will be determined based on the
average five-day trading price of the PhyMatrix stock prior to closing, less
any closing adjustments. The transaction is subject to the approval and the
satisfaction of certain conditions.
On April 9, 1997, CSL acquired the business and certain assets of
Neuropsychiatric Services of Greater Washington, Inc. for $725,000 plus
contingent consideration based on revenue and profitability measures over
the next five years. The contingent payments will equal 10% of the excess
gross revenue, as defined, provided the gross operating margins of the
acquired business exceed 30%.
The Company is in negotiations to settle its obligations to a consultant
under a profit-sharing agreement (see Note 7). On April 23, 1997, CSL
received a letter of understanding from the consultant proposing to settle
the obligations under his profit-sharing agreement. Under the terms of the
proposed settlement, the consultant would receive $2.5 million in cash and a
promissory note for approximately $2,000,000.
* * * * * *
-15-
<PAGE>
CLINICAL STUDIES, LTD.
FINANCIAL STATEMENTS AND
SUPPLEMENTAL SCHEDULE
FOR THE YEAR ENDED
DECEMBER 31, 1994
INDEPENDENT AUDITORS' REPORT
<PAGE>
Sansiveri, Kimball & McNamee, L.L.P.
------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
BUSINESS CONSULTANTS
Michael A. DeCataldo
M. Douglas Fay
Joseph H. Kimball, Jr.
Stephen P. Massed
John J. McNamee
John L. Pucci
Jerry A. Sansiveri
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Clinical Studies Ltd.:
We have audited the accompanying balance sheet of Clinical Studies Ltd. as of
December 31, 1994, and the related statements of operations and deficit and cash
flows for the year then ended. This financial statement is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 statement referred to above presents fairly, in
all material respects, the financial position of Clinical Studies Ltd. as of
December 31, 1994, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The accompanying
supplemental schedule is presented for the purpose of additional analysis and is
not a required part of the basic consolidated financial statements. Such
information has been subjected to the auditing procedures applied in the audits
of the basic consolidated financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic consolidated financial
statements taken as a whole.
/s/ Sansiveri, Kimball & McNamee, L.L.P.
April 14, 1997 (except for Note 7,
which is dated April 23, 1997)
55 Dorrance Street, Providence, RI 02903-2220 o Providence o Newport o Westerly
401/331-0500, Fax 401/331-9040, E-Mail: [email protected]
Member of Division for CPA Firms/AICPA, SEC Practice Section and
Associated Regional Accounting Firms.
<PAGE>
CLINICAL STUDIES LTD.
BALANCE SHEET
DECEMBER 31, 1994
- --------------------------------------------------------------------------------
-ASSETS-
- --------------------------------------------------------------------------------
CURRENT ASSETS (Notes 2 and 5):
Cash and cash equivalents ................................ $ 107,402
Accounts receivable-contracts ............................ 214,175
---------
Total current assets ................................. 321,577
---------
PROPERTY AND EQUIPMENT - At cost (Note 2):
Furniture and office equipment ........................... 87,379
Medical equipment ........................................ 27,612
Leasehold improvements ................................... 4,800
---------
Total ................................................ 119,791
Less accumulated depreciation and amortization ........... 42,542
---------
Property and equipment, net ............................ 77,249
LEASED PROPERTY UNDER CAPITAL LEASE - Less accumulated
amortization of $43,134 (Notes 2 and 6) .................. 155,935
OTHER ASSET - Deposits ..................................... 13,933
---------
TOTAL ................................................ $ 568,694
=========
- --------------------------------------------------------------------------------
-LIABILITIES AND STOCKHOLDERS' EQUITY-
- --------------------------------------------------------------------------------
CURRENT LIABILITIES:
Current portion of obligation under capital lease
(Note 4) ............................................... $ 35,460
Accounts payable - trade ................................. 86,420
Deferred revenue ......................................... 57,400
Accrued liabilities:
Payroll and payroll taxes .............................. 118,284
Consulting fees ........................................ 95,929
---------
Total current liabilities ............................ 393,493
OBLIGATION UNDER CAPITAL LEASE - Less current portion
(Note 4) ................................................. 127,713
---------
COMMITMENTS (Note 4)
STOCKHOLDERS' EQUITY:
Common stock - no par value; authorized 1,000 shares;
issued and outstanding, 100 shares .................... 100
Additional paid in capital (Notes 4 and 6) .............. 120,000
Deficit ................................................. (72,612)
---------
Total stockholders' equity .......................... 47,488
---------
TOTAL ............................................... $568,694
=========
See notes to financial statement.
<PAGE>
- --------------------------------------------------------------------------------
CLINICAL STUDIES LTD.
STATEMENT OF OPERATIONS AND RETAINED DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REVENUE (Note 5) ................................................ $ 4,921,285
OPERATING EXPENSES .............................................. 5,019,282
-----------
LOSS FROM OPERATIONS ............................................ (97,997)
-----------
OTHER INCOME (DEDUCTION):
Interest income ............................................... 461
Interest expense .............................................. (1,166)
-----------
Other deduction, net ........................................ (705)
-----------
NET LOSS ......................................................... (98,702)
RETAINED EARNINGS, JANUARY 1, 1994 ............................... 26,090
-----------
DEFICIT, DECEMBER 31, 1994 ....................................... $ (72,612)
===========
See notes to financial statement.
- --------------------------------------------------------------------------------
<PAGE>
CLINICAL STUDIES LTD.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
- --------------------------------------------------------------------------------
RECONCILIATION OF CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss ........................................................ $ (98,702)
Noncash expenses and revenue included in net income -
depreciation and amortization ................................. 58,851
Changes in operating assets and liabilities:
Accounts receivable ........................................... (29,427)
Accounts payable and accrued expenses ......................... 209,870
Deferred revenue .............................................. (221,065)
----------
NET CASH USED BY OPERATING ACTIVITIES ............................ (80,473)
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment ......................................... (73,916)
Payments received on notes receivable - shareholder ........... 70,000
Payments received on notes receivable - other ................. 90,000
----------
NET CASH PROVIDED BY INVESTING ACTIVITIES ....................... 86,084
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on obligations under capital leases .................. (35,896)
Payments on note payable - stockholder ........................ (21,000)
Payments on note payable - related party ...................... (39,780)
----------
NET CASH USED BY FINANCING ACTIVITIES ........................... (96,676)
----------
DECREASE IN CASH AND CASH EQUIVALENTS ........................... (91,065)
CASH AND CASH EQUIVALENTS, JANUARY 1, 1994 ...................... 198,467
----------
CASH AND CASH EQUIVALENTS, DECEMBER 31, 1994 .................... $ 107,402
==========
See notes to financial statements.
<PAGE>
CLINICAL STUDIES LTD.
NOTES TO FINANCIAL STATEMENT
---------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
----------
Clinical Studies Ltd. (the Company) performs clinical research studies
sponsored by pharmaceutical companies and clinical research organizations
(sponsors). The Company enrolls patients, administers medications and
submits data to the sponsors for analysis. The Company operates in Rhode
Island, Massachusetts, Florida, Arizona, and Pennsylvania.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include demand deposits held at financial
institutions and short-term investments with original maturities of less
than three months.
Accounts Receivable - Contracts
-------------------------------
Accounts receivable - contracts represents amounts owed to the Company by
sponsors for work performed in accordance with contracts with such
sponsors.
Deferred Revenue
----------------
Deferred revenue represents payments received in advance by the Company for
performing work in accordance with contracts with sponsors.
Revenue Recognition
-------------------
The company generates revenue based on contracts it enters into to perform
clinical studies. Generally these contracts specify a fee to be received
for patients enrolled in the study. Revenues are recognized as patient
visits are conducted. Costs related to the studies are generally expensed
as incurred. Payments received in excess of revenue recognized are reported
as deferred revenue.
<PAGE>
Depreciation and Amortization
Depreciation and amortization of equipment, leasehold improvements, and
leased property under capital leases are computed using the straight-line
method over 5 to 7 years, 31-1/2 years, and 5 years, respectively, for
financial reporting purposes. Accelerated methods of depreciation and
amortization are used for income tax purposes.
Income Taxes
------------
The Company, with the consent of its stockholders, has elected to be
treated as an S Corporation as provided under the Internal Revenue Code,
whereby income taxes are the liability of the stockholders. Accordingly,
the accompanying balance sheet does not include a liability for Federal or
state taxes and the statement of operations and retained deficit does not
include a provision for such income taxes.
Employee Benefit Plans
----------------------
As of January 1, 1995, the Company began participating in a profit sharing
plan for all employees. Such plan qualifies under section 401(k) of the
Internal Revenue Code. The profit sharing plan covers all employees who
have completed six months of service and have attained age twenty-one. The
Company allows eligible employees to contribute up to 15% of their
compensation and the Company may match up to 20% of the employee's
contribution for the first 5% of covered compensation. In addition, the
Company may elect to make additional contributions at the discretion of the
Board of Directors.
Estimates
---------
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 balance sheet.
Actual results could differ from those estimates.
Advertising
-----------
The Company expenses its advertising costs in the period in which such
costs are incurred.
2. SHORT-TERM FINANCING ARRANGEMENT
The Company has a line-of-credit agreement with a bank. The line-of-credit
has maximum available borrowings of $175,000 and requires monthly payment
of interest at the bank's prime rate plus 1%. Such note requires a 5%
compensating cash balance and is
2
<PAGE>
collateralized by all business assets and the personal guarantees of a
stockholder and an officer of the Company. As of December 31, 1994, the
Company had no outstanding borrowings on such line of credit.
On October 1, 1996, the Company entered into a $5,000,000 revolving
line-of-credit agreement with a bank. Interest, payable monthly, is
computed at .25% above the bank's base rate. Such agreement is
collateralized by a security interest in all assets and the stock of
Clinical Studies Ltd. and Clinical Marketing Ltd., a company related
through common ownership. The agreement expires on September 30, 1999. In
connection with this line-of-credit agreement, Clinical Studies Ltd. is
subject to certain restrictive covenants, which provide for, among other
things, the maintenance of certain financial ratios. The most restrictive
financial covenants are the requirement to earn combined net income of
$100,000 per quarter and maintain a net worth of $2.45 million at all
times.
3. RELATED PARTY TRANSACTIONS
Management fees consist of amounts paid for management related services to
a stockholder and an officer of the Company who is related to the
stockholders. Approximately $802,000 of such management fees were incurred
for the year ended December 31, 1994.
4. COMMITMENTS
Operating Leases
----------------
The Company leases office space under various operating leases that expire
at varying dates through the year 1999. Such operating leases require the
payment of monthly rent and certain operating expenses.
As of December 31, 1994, the lease agreements require approximate annual
base rental payments as follows:
Year Amount
------ ------
1995 ........................................ $161,000
1996 ........................................ 165,000
1997 ........................................ 136,000
1998 ........................................ 143,000
1999 ........................................ 111,000
Rent expense for the year ended December 31, 1994 was approximately
$305,000.
3
<PAGE>
Capital Lease
-------------
The Company leases certain equipment under a capital lease. The future
minimum lease payments under the capital lease, together with the present
value of the net minimum lease payments as of December 31, 1994 are as
follows:
Year Amount
---- ------
1995 ............................................ $53,133
1996 ............................................ 53,133
1997 ............................................ 53,133
1998 ............................................ 45,163
-------
Net minimum lease payments ...................... 204,562
Less amount representing interest ............... 41,389
-------
Present value of net minimum lease payments ..... 163,173
Less current portion ............................ 35,460
-------
Long-term portion of obligation under
capital lease ................................. $127,713
========
Consulting Agreement
--------------------
The Company has an agreement with a consultant whereby for consideration
paid in the amount of $120,000, the consultant is to receive up to 10% of
income, before taxes and certain management fees paid to officer of the
Company for the year. The payment is limited to that percentage of net
income (as specified in the agreement) of sites in existence on June 15,
1996. In the event that a majority interest in the Company is sold, such
consultant is entitled up to 10% of the proceeds of the sale.
Contingent Obligations
----------------------
As of December 31, 1995, in the event that a majority interest in the
common stock of Clinical Studies Ltd. is sold by the Company's
stockholders, Clinical Studies Ltd. is obligated to pay to one of its
officers and another party an amount up to a combined total of 15% of the
consideration received by the stockholders. Alternatively, in the event
that Clinical Studies Ltd. registers a class of its equity securities under
the Securities Act of 1933, the officer of Clinical Studies Ltd. will be
entitled to receive 5% of such class of equity securities.
5. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash in the bank in
excess of FDIC insurance limits and
4
<PAGE>
accounts receivable - contracts. As of December 31, 1994, the Company has
approximately $69,000 in the bank in excess of FDIC insurance limits. These
funds are on deposit with a high credit quality financial institution.
Management believes that credit risk with respect to accounts receivable -
contracts is limited due to the large number of customers comprising the
Company's customer base and the credit worthiness of its customer base. The
Company has not experienced any significant credit losses.
At December 31, 1994, two customers accounted for 100% of accounts
receivable - contracts.
Contract revenue associated with three pharmaceutical companies accounted
for approximately 59% of revenue for the year ended December 31, 1994.
6. SUPPLEMENTAL CASH FLOW INFORMATION
The accompanying statement of cash flows excludes the effect of the
following noncash transactions:
o During 1994, the lease of certain equipment resulted in an asset and
obligation under capital lease of approximately $199,000;
o During 1994, the Company entered into an agreement whereby a consultant
receives 10% of the net profits of the company in exchange for
consideration of $120,000. This consideration was an amount of a
liability which was due to such consultant. The effect of this
transaction was an increase of additional paid in capital and a reduction
of deferred revenue of $120,000.
7. SUBSEQUENT EVENTS
Clinical Marketing Ltd., a company owned by a shareholder and a relative of
another shareholder of Clinical Studies, Ltd., began operations on
September 1, 1995 and provides advertising and mixed media promotion
services for the Company.
On August 31, 1996, the Company acquired the business and certain assets of
a single site clinical research company in Sarasota, Florida for $300,000
plus contingent consideration based on profitability measures over the next
five years. The contingent payments will equal 15% of the increase in
adjusted income before tax, of the acquired business, over the prior year's
amount. In no event shall the contingent payments be less than $221,025.
5
<PAGE>
On October 4, 1996, the Company acquired the business and certain assets of
a multi-site clinical research company in Pennsylvania for approximately
$6,850,000 plus contingent consideration based on profitability measures
over the next five years. The contingent payments will equal 15% of the
excess of adjusted income before tax over $2,000,000.
On January 1, 1997, the Company and Clinical Marketing Ltd. merged
operations into one Delaware Subchapter S Corporation, also named Clinical
Studies Ltd. Each share of the Company and Clinical Marketing Ltd. was
converted to 5,324.53 shares and 1,562.27 shares, respectively, of the new
entity.
On March 12, 1997, the shareholders of the Company signed a letter of
intent to sell Clinical Studies Ltd. to PhyMatrix Corp. (PhyMatrix), a
publicly traded company. The purchase price will be determined based on the
average five-day trading price of the PhyMatrix stock prior to closing,
less any closing adjustments. The transaction is subject to the approval
and the satisfaction of certain conditions.
On April 9, 1997, the Company acquired the business and certain assets of
Neuropsychiatric Services of Greater Washington, Inc. for $725,000 plus
contingent consideration based on revenue and profitability measures over
the next five years. The contingent payments will equal 10% of the excess
gross revenue, as defined, provided the gross operating margins of the
acquired business exceed 30%.
On April 23, 1997, the Company received a letter of understanding from a
former consultant (see Note 4) to settle the obligations under his
profit-sharing agreement. Under the terms of the proposed settlement, the
former consultant will receive $2.5 million in cash and a promissory note
for approximately $2,000,000.
6
<PAGE>
Schedule
--------
CLINICAL STUDIES LTD.
SCHEDULE OF OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1994
- --------------------------------------------------------------------------------
Payroll .................................................. $1,548,800
Management fees .......................................... 802,000
Consulting fees .......................................... 742,280
Advertising .............................................. 482,315
Rent ..................................................... 305,647
Office expense ........................................... 179,303
Payroll taxes ............................................ 131,598
Employee benefits ........................................ 133,354
Travel and entertainment ................................. 95,461
Telephone ................................................ 96,598
Insurance ................................................ 29,159
Professional fees ........................................ 73,467
Depreciation and amortization ............................ 58,851
Patient travel ........................................... 97,572
Postage .................................................. 30,425
Utilities ................................................ 27,625
Supplies ................................................. 98,742
Dues and subscriptions ................................... 3,409
Taxes .................................................... 14,247
Administrative ........................................... 42,500
Repairs and maintenance .................................. 3,867
Donations ................................................ 1,905
Education ................................................ 3,808
Licenses and fees ........................................ 5,592
Miscellaneous ............................................ 10,757
-----------
Total .................................................... $5,019,282
==========
