As filed with the Securities and Exchange Commission on November 3, 1997
Registration No. 333-09187
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
Post-Effective Amendment No. 5
To
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
PHYMATRIX CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 8099 65-0617076
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
777 South Flagler Drive
West Palm Beach, FL 33401
(561) 655-3500
(Address, including zip code, and telephone number, including
area code of Registrant's principal executive offices)
---------------
Abraham D. Gosman
PhyMatrix Corp.
777 South Flagler Drive
West Palm Beach, FL 33401
(561) 655-3500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
Copies of communications to:
Michael J. Bohnen, Esquire
Nutter, McClennen & Fish, LLP
One International Place
Boston, MA 02110
(617) 439-2000
---------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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<CAPTION>
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Proposed maximum Amount of
Title of each class of securities Amount to be offering price per Proposed maximum registration
to be registered registered share(1) aggregate offering price(1) fee
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value 5,000,000 shares $23.63 $118,150,000 $40,742(2)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Determined pursuant to Rule 457(c) under the Securities Act of 1933, as
amended, based upon the average of the high and low prices per share of
Common Stock reported on the Nasdaq National Market on July 26, 1996.
(2) Previously paid.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PROSPECTUS
5,000,000 Shares
PhyMatrix Corp.
a Physician Practice Management Company
Common Stock
---------------
This Prospectus relates to 5,000,000 shares of common stock, $.01 par value
per share (the "Common Stock"), of PhyMatrix Corp. ("PhyMatrix" or the
"Company") that may be offered and issued by the Company from time to time in
connection with acquisitions of other businesses or properties by the Company.
PhyMatrix intends to concentrate its acquisitions in areas related to the
current business of PhyMatrix. If the opportunity arises, however, PhyMatrix
may attempt to make acquisitions that are either complementary to its present
operations or which it considers advantageous even though they may be
dissimilar to its present activities. The consideration for any such
acquisition may consist of shares of Common Stock, cash, notes or other
evidences of debt, assumptions of liabilities or a combination thereof, as
determined from time to time by negotiations between PhyMatrix and the owners
or controlling persons of businesses or properties to be acquired.
The shares covered by this Prospectus may be issued in exchange for shares of
capital stock, partnership interests or other assets representing an interest,
direct or indirect, in other companies or other entities, in exchange for
assets used in or related to the business of such companies or entities, or
otherwise pursuant to the agreements providing for such acquisitions. The terms
of such acquisitions and of the issuance of shares of Common Stock under
acquisition agreements generally will be determined by direct negotiations with
the owners or controlling persons of the businesses or properties to be
acquired or, in the case of entities that are more widely held, through
exchange offers to stockholders or documents soliciting the approval of
statutory mergers, consolidations or sales of assets. It is anticipated that
the shares of Common Stock issued in any such acquisition will be valued at a
price reasonably related to the market value of the Common Stock either at the
time of agreement on the terms of an acquisition or at or about the time of
delivery of the shares.
It is not expected that underwriting discounts or commissions will be paid by
the Company in connection with issuances of shares of Common Stock under this
Prospectus. However, finders' fees or brokers' commissions may be paid from
time to time in connection with specific acquisitions, and such fees may be
paid through the issuance of shares of Common Stock covered by this Prospectus.
Any person receiving such a fee may be deemed to be an underwriter within the
meaning of the Securities Act of 1933, as amended (the "Securities Act").
PhyMatrix's Common Stock is listed on the Nasdaq National Market under the
symbol "PHMX." The closing market price of PhyMatrix Common Stock on the Nasdaq
National Market on October 31, 1997 was $ 14.75.
---------------
Prospective investors should carefully consider the factors set forth
under the section "Risk Factors" beginning on page 6.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The Date of this Prospectus is November 3, 1997
<PAGE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information and representations must
not be relied upon as having been authorized by the Company. This Prospectus
does not constitute an offer to sell or a solicitation of any offer to buy the
securities described herein by anyone in any jurisdiction in which such offer
or solicitation is not authorized, or in which the person making the offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make such offer or solicitation. Under no circumstances shall the delivery
of this Prospectus or any sale made pursuant to this Prospectus create any
implication that the information contained in this Prospectus is correct as of
any time subsequent to the date of this Prospectus.
----------------
TABLE OF CONTENTS
Page
----
Prospectus Summary .................................................... 3
Risk Factors .......................................................... 6
Price Range of Common Stock ........................................... 11
Dividend Policy ....................................................... 11
Selected Historical Financial Data ..................................... 12
Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................ 21
Business ............................................................. 32
Management ............................................................. 45
Certain Transactions ................................................. 51
Principal Stockholders ................................................. 53
Description of Capital Stock ........................................... 54
Plan of Distribution ................................................. 57
Validity of Common Stock .............................................. 57
Experts ................................................................ 57
Additional Information ................................................. 58
Index to Financial Statements ........................................ F-1
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
See "Risk Factors" for information that should be considered by prospective
investors.
The Company
The Company is a multi-specialty physician management company that
provides management services to the medical community. The Company also
develops medical malls, medical office buildings, and health parks, both for
its own account and for leading hospitals and health systems. The Company's
primary strategy is to develop management networks in specific geographic
locations by affiliating with physicians, medical providers and medical
networks. The Company affiliates with physicians by acquiring their practices
and entering into long-term management agreements with the acquired practices
and through the management of independent physician associations ("IPAs") and
specialty care physician networks by management service organizations ("MSOs")
in which the Company has ownership interests. Where appropriate, the Company
supports its affiliated physicians with related diagnostic and therapeutic
medical support services. The Company's medical support services include
radiation therapy, diagnostic imaging, infusion therapy, home health care,
lithotripsy services and ambulatory surgery. Since its first acquisition in
September 1994, the Company has acquired the practices of and entered into long
term agreements to affiliate with approximately 360 physicians; has obtained
interests in MSOs in Connecticut, Georgia, New Jersey, New York and Florida
that provide management services to IPAs composed of over 3,600 multi-specialty
physicians; purchased a company that provides contract management services to
approximately 2,500 physicians in specialty care networks; and acquired several
medical support service companies and a medical facility development company.
The Company believes that its strategy of developing management networks
in specific geographic locations creates synergies, achieves operating
efficiencies and responds to the cost-containment initiatives of payors,
particularly managed care companies. To date, the Company has acquired the
practices of and affiliated with 70 oncologists and provides comprehensive
cancer-related support services including radiation therapy, infusion therapy
and diagnostic imaging. The Company has contracts with managed care
organizations under which the Company and its affiliated physicians provide
cancer-related health care services to approximately 230,000 covered lives. In
addition, through management of contracts with 2,500 physicians, the Company
facilitates the delivery of specialty health care services to approximately
7,300,000 member patients. The Company plans to continue to increase its
managed care capabilities into additional specialty care physician networks and
to expand existing relationships with established managed care organizations.
The Company also intends to develop additional disease management networks for
the treatment of other chronic illnesses such as diabetes, cardiovascular
diseases and infectious diseases.
In certain targeted markets, the Company organizes its affiliated
physicians and related medical support services into integrated clusters of
disease specialty and primary care networks, which it terms local provider
networks ("LPNs"). LPNs are designed to provide a comprehensive range of
physician and medical support services within specific geographic regions. The
Company believes that its LPN structure achieves operating efficiencies and
enhances its ability to secure contracts with managed care organizations. To
date, the Company is developing LPNs in each of the Florida, Atlanta,
Washington, D.C./Baltimore areas and the tri-state area of Connecticut, New
York and New Jersey.
As part of its strategy to integrate physician practices, the Company
provides medical facility development services to related and unrelated third
parties for the development of health parks, medical malls and medical office
buildings. Such services include project finance assistance, project
management, construction management, construction design engineering, physician
recruitment, leasing and marketing. While the Company incurs certain
administrative and other expenses in the course of providing such services, it
does not incur costs of construction or risks of project ownership. The
Company's strategy in financing its projects is to involve future tenants as
significant investors in and owners of the developed medical facilities.
Because most of its tenants are physicians and medical support service
companies, the Company believes that the relationships that it develops with
these parties through its medical facility development efforts also enhances
the Company's ability to affiliate with physicians and acquire physician
practices and medical support service companies. Further, the Company believes
that the development of health parks, medical malls and medical office
buildings in certain markets will aid in the integration of its affiliated
physicians and medical support services.
3
<PAGE>
The Company's principal place of business is 777 South Flagler Drive,
Suite 1000E, West Palm Beach, Florida 33401; and its telephone number at that
address is (561) 655-3500. Unless otherwise indicated or required by the
context, references to the "Company" include its consolidated subsidiaries.
Recent Developments
On October 15, 1997, the Company completed the acquisition of Clinical
Studies, Ltd. ("CSL") pursuant to the Amended and Restated Agreement and Plan
of Merger (the "Merger Agreement") dated as of July 15, 1997 by and among the
Company, CSL, PhyMatrix Acquisition I, Inc., a Delaware corporation ("PhyMatrix
Acquisition"), Dr. Michael Rothman, Dr. Walter Brown, Michael T. Heffernan and
Ronald Phillips as Trustee of The Alexander Rothman 1993 Qualified Sub-Chapter
S Trust and as Trustee of The Julie Rothman 1993 Qualified Sub-Chapter S Trust.
Pursuant to the Merger Agreement, PhyMatrix Acquisition, a wholly-owned
subsidiary of PhyMatrix, merged with and into CSL (the "Merger"), and CSL
became a wholly-owned subsidiary of PhyMatrix. The purchase price for CSL
consisted of an aggregate of 5,204,305 shares of the Company's common stock
(the "Shares") plus certain costs and expenses assumed in the Merger. The
Company has agreed to register under the Securities Act of 1933, as amended,
the resale of the Shares acquired by the former shareholders of CSL in the
Merger.
CSL is a multi-therapeutic site management organization ("SMO") based in
Providence, Rhode Island providing clinical investigative site management
services to 22 research facilities in 11 states. CSL wholly-owns and centrally
manages Phase I-IV research facilities conducting clinical trials for
pharmaceutical companies and contract research organizations ("CROs"). CROs are
independent companies that assist pharmaceutical and biotechnology companies
with the complex and multi-stage drug regulatory process. Although CSL has
conducted and continues to conduct clinical research in a wide variety of
therapeutic areas, the company's focus historically has been in trials in the
therapeutic areas of the central nervous system, geriontology, women's health
and endocrinology.
CSL contracts either directly with a clinical trial sponsor, such as a
pharmaceutical or biotechnology company, or a CRO to engage in the clinical
testing of certain drugs or medical devices required by the Food and Drug
Administration and various international authorities prior to the
commercialization of a pharmaceutical product. As pharmaceutical companies
focus on ways in which to reduce development costs and improve profitability,
these companies are shifting many aspects of the drug development process to
CROs and SMOs in order to reduce the costs associated with and improve the
speed of the clinical research and testing process. The Company believes that
through CSL's committed network of research facilities functioning in a
centralized and uniform operating environment, it can provide an efficient,
responsive and effective resource for sponsors and CROs who seek to expedite
the clinical trial process in an effort to bring new products to market.
In connection with the Merger, the management of the Company has agreed to
recommend Michael T. Heffernan, the Chief Executive Officer of CSL, for
election to the Board of Directors of the Company, and the Company and Mr.
Heffernan have entered into an employment agreement, dated October 15, 1997,
relating to Mr. Heffernan's continued employment as Chief Executive Officer of
CSL.
The Merger has been accounted for as a pooling of interests. Accordingly,
the financial statements of the Company for all periods prior to the effective
date of the Merger have been restated to include CSL and Clinical Marketing,
Ltd., which was merged into CSL on January 1, 1997. The restated supplemental
financial statements of the Company are included elsewhere in this Prospectus
together with Management's Discussion and Analysis of Financial Condition and
Results of Operations relating to such restated supplemental financial
statements. Also included elsewhere in this Prospectus are certain historical
financial statements of CSL and certain pro forma financial information which
give effect to the Merger.
Prospective investors are cautioned that the statements in this Prospectus
that are not descriptions of historical facts may be forward-looking
statements, including, but not limited to, statements contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Such statements reflect management's current views, are based on
many assumptions and are subject to risks and uncertainties. Actual results
could differ materially from those currently anticipated due to a number of
factors, including, but not limited to, those discussed in "Risk Factors."
4
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Combined Consolidated Consolidated
June 24, 1994 Combined Consolidated Consolidated Six Months Six Months
(Inception) to Year Ended Month Ended Year Ended Ended Ended
December 31, December 31, January 31, January 31, July 31, July 31,
1994(1) 1995 1996(2) 1997 1996 1997
---------------- -------------- -------------- -------------- -------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenue ........................ $ 2,447 $ 70,733 $ 10,715 $ 189,961 $ 77,631 $ 145,647
-------- --------- ----------- ----------- ----------- -----------
Operating expenses:
Cost of affiliated physician
management services ............... -- 9,656 2,797 42,245 17,412 33,535
Salaries, wages and benefits ...... 2,142 31,976 3,637 52,313 23,833 33,812
Depreciation and amortization ...... 107 3,863 535 7,144 3,266 4,533
Rent expense ........................ 249 4,503 565 7,653 3,441 6,521
Earn out payment .................. -- 1,271 -- -- -- --
Provision for closure loss ......... -- 2,500 -- -- -- --
Other .............................. 1,150 23,706 3,515 60,764 21,044 53,534
-------- --------- ----------- ----------- ----------- -----------
Income (loss) from operations ...... (1,201) (6,742) (334) 19,842 8,635 13,712
Interest expense, net ............... 95 4,852 812 1,658 810 1,383
(Income) loss from investments
in affiliates ..................... -- (569) 30 (709) (269) (413)
-------- --------- ----------- ----------- ----------- -----------
Net income (loss) before taxes ...... (1,296) (11,025) (1,176) 18,893 8,094 12,742
Income tax expense (3)................ -- -- -- 6,836 3,032 4,546
======== ========= ----------- ----------- ----------- -----------
Net income (loss) .................... $ (1,296) $ (11,025) $ (1,176) $ 12,057 $ 5,062 $ 8,196
======== ========= =========== =========== =========== ===========
Net income (loss) per share ......... $ (0.08) $ 0.54 $ 0.23 $ 0.34
=========== =========== =========== ===========
Weighted average shares
outstanding ........................ 14,204,305 22,511,448 21,689,631 23,863,289
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, January 31, January 31, July 31, July 31,
1994 1995 1996 1997 1996 1997
-------------- -------------- ------------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital ......... $ 2,590 $ (22,286) $ 44,209 $ 107,465 $131,566 $ 94,604
Accounts receivable, net ... 3,778 20,711 21,562 35,846 29,434 48,950
Total assets ............... 15,408 132,187 180,007 298,124 264,621 323,383
Total debt ............... 1,369 96,941 36,470 111,422 116,503 111,385
Shareholders' equity ...... 11,667 12,678 127,209 148,891 132,813 177,578
</TABLE>
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(1) The Company was incorporated in October 1995 to combine the business
operations of certain companies (the "Related Companies") controlled by
Abraham D. Gosman, the Company's Chairman and Chief Executive Officer. The
business operations of the Related Companies were acquired from third
parties in transactions completed since September 1994. Simultaneously
with the closing of the Company's initial public offering on January 23,
1996 (the "Initial Public Offering"), the Related Companies were
transferred to the Company in exchange for 13,307,450 shares of the
Company's Common Stock (the "Formation").
(2) In January 1996, the Company changed its fiscal year end from December 31
to January 31.
(3) Provisions for income taxes have not been reflected in the combined
financial statements because there is no taxable income on a combined
basis.
5
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective purchasers should carefully consider the factors set forth below
before purchasing the shares of Common Stock offered hereby.
Limited Operating History
The Company has a limited operating history and acquired its first
operating company in September 1994. Almost all of the businesses acquired by
the Company to date were operated by managements unaffiliated with the
Company's management or with each other.
Risks Related to Growth Strategy
The Company's strategy involves growth primarily through affiliation with
physicians and acquisition of medical practices and other businesses. The
Company is subject to various risks associated with its acquisition growth
strategy, including the risk that the Company will be unable to identify,
recruit or acquire suitable acquisition candidates or to integrate and manage
the acquired practices or companies. The growth of the Company is largely
dependent on the Company's ability to form networks of affiliated physicians
from its acquired practices, to manage and control costs, and to realize
economies of scale. Any failure of the Company to implement economically
feasible acquisitions and affiliations may have a material adverse effect on
the Company. There can be no assurance that the Company will be able to achieve
and manage planned growth, that the assets of physician practice groups or
other health care providers will continue to be available for acquisition by
the Company, that the liabilities assumed by the Company in any acquisition
will not have a material adverse effect on the Company, or that the addition of
physician practice groups or other health care providers will be profitable for
the Company.
Risks Related to Capital Requirements
The Company's acquisition and expansion programs will require substantial
capital resources. In addition, the operation of physician groups, integrated
networks and related medical support service companies requires ongoing capital
expenditures. There can be no assurance that the Company will be able to raise
additional capital when needed on satisfactory terms or at all. Any limitation
on the Company's ability to obtain additional financing could have a material
adverse effect on the Company.
Government Regulation
Providers of health care services, including physicians and other
clinicians, are subject to extensive federal and state regulation. The fraud
and abuse provisions of the Social Security Act prohibit the solicitation,
payment, receipt or offering of any direct or indirect remuneration in return
for, or the inducement of, the referral of patients, items or services that are
paid for, in whole or in part, by Medicare or Medicaid. These laws also impose
significant penalties for false or improper billings for physician services and
impose restrictions on physicians' referrals for designated health services to
entities with which they have financial relationships. Violations of these laws
may result in substantial civil or criminal penalties for individuals or
entities, including large civil monetary penalties and exclusion from
participation in the Medicare and Medicaid programs. Similar state laws also
apply to the Company. Such exclusion and penalties, if applied to the Company's
affiliated physician groups or medical support service providers, could have a
material adverse effect on the Company. See "Business--Government Regulation."
The laws of many states prohibit business corporations such as the Company
from exercising control over the medical judgments or decisions of physicians
and from engaging in certain financial arrangements, such as splitting fees
with physicians. These laws and their interpretations vary from state to state
and are enforced by both the courts and regulatory authorities, each with broad
discretion. Expansion of the operations of the Company to certain jurisdictions
may require structural and organizational modifications of the Company's form
of relationship with physician groups, which could have an adverse effect on
the Company. There can be no assurance that the Company's physician management
agreements will not be challenged as constituting the unlicensed practice of
medicine or that the enforceability of the provisions of such agreements,
including non-competition agreements, will not be limited.
Under certain provisions of the Omnibus Budget Reconciliation Act of 1993
known as "Stark II," physicians who refer Medicare and Medicaid patients to the
Company for certain designated services may not own stock in the Company, and
the Company may not accept such referrals from physicians who own stock in the
Company. Stark II contains an exemption which applies to the Company during any
year if at the end of the previous fiscal
6
<PAGE>
year the Company had stockholders' equity in the amount of at least $75
million. The Company was not eligible for this exemption as of its fiscal year
ending December 31, 1995. In 1996, the Company changed its fiscal year end to
January 31, at which time it satisfied the Stark II stockholders' equity
exception. Violation of Stark II by the Company could have a material adverse
effect on the Company.
The Company believes that its operations are conducted in material
compliance with applicable laws, however, the Company has not received a legal
opinion to this effect and many aspects of the Company's business operations
have not been the subject of state or federal regulatory interpretation.
Moreover, as a result of the Company providing both physician practice
management services and medical support services, the Company may be the
subject of more stringent review by regulatory authorities, and there can be no
assurance that a review of the Company's operations by such authorities will
not result in a determination that could have a material adverse effect on the
Company or its affiliated physicians. Additionally, there can be no assurance
that the health care regulatory environment will not change so as to restrict
the Company's or the affiliated physicians' existing operations or their
expansion. The regulatory framework of certain jurisdictions may limit the
Company's expansion into, or ability to continue operations within, such
jurisdictions if the Company is unable to modify its operational structure to
conform to such regulatory framework or to obtain necessary approvals, licenses
and permits. Any limitation on the Company's ability to expand could have a
material adverse effect on the Company. See "Business--Government Regulation."
Dependence on Third Party Reimbursement; Trends and Cost Containment
Substantially all of the Company's patient service revenues are derived
from third party payors. The Company's revenues and profitability may be
materially adversely affected by the current trend within the health care
industry toward cost containment as government and private third party payors
seek to impose lower reimbursement and utilization rates and negotiate reduced
payment schedules with service providers. The Company believes that this trend
will continue to result in a reduction from historical levels of per-patient
revenue. Continuing budgetary constraints at both the federal and state level
and the rapidly escalating costs of health care and reimbursement programs have
led, and may continue to lead, to significant reductions in government and
other third party reimbursements for certain medical charges and to the
negotiation of reduced contract rates or capital or other financial
risk-shifting payment systems by third party payors with service providers.
Both the federal government and various states are considering imposing
limitations on the amount of funding available for various health care
services. The Company cannot predict whether or when any such proposals will be
adopted or, if adopted and implemented, what effect, if any, such proposals
would have on the Company. Further reductions in payments to physicians or
other changes in reimbursement for health care services could have a material
adverse effect on the Company, unless the Company is otherwise able to offset
such payment reductions.
Rates paid by private third party payors, including those that provide
Medicare supplemental insurance, are based on established physician, clinic and
hospital charges and are generally higher than Medicare payment rates. Changes
in the mix of the Company's patients among the non-government payors and
government sponsored health care programs, and among different types of
non-government payor sources, could have a material adverse effect on the
Company.
The Company is a provider of certain medical treatment and diagnostic
services including, but not limited to radiation therapy, infusion therapy,
lithotripsy and home care. Because many of these services receive governmental
reimbursement, they may be subject from time to time to changes in both the
degree of regulation and level of reimbursement. Additionally, factors such as
price competition and managed care also could reduce the Company's revenues.
See "Business--Reimbursement and Cost Containment."
There can be no assurance that payments under governmental and private
third party payor programs will not be reduced or will, in the future, be
sufficient to cover costs allocable to patients eligible for reimbursement
pursuant to such programs, or that any reductions in the Company's revenues
resulting from reduced payments will be offset by the Company through cost
reductions, increased volume, introduction of new procedures or otherwise. See
"Business--Reimbursement and Cost Containment."
7
<PAGE>
Risks Associated with Managed Care Contracts
As an increasing percentage of patients come under the control of managed
care entities, the Company believes that its success will be, in part,
dependent upon the Company's ability to negotiate contracts with health
maintenance organizations ("HMOs"), employer groups and other private third
party payors pursuant to which services will be provided on a risk-sharing or
capitated basis. Under some of these agreements, a health care provider accepts
a predetermined amount per member per month in exchange for providing all
covered services to patients. Such contracts pass much of the economic risk of
providing care from the payor to the provider. The Company's success in
implementing its strategy of entering into such contracts in markets served by
the Company could result in greater predictability of revenues, but increased
risk to the Company resulting from uncertainty regarding expenses. To the
extent that patients or enrollees covered by such contracts require more
frequent or extensive care than is anticipated, additional costs would be
incurred, resulting in a reduction in operating margins. In the worst case,
revenues associated with risk-sharing contracts or capitated provider networks
would be insufficient to cover the costs of the services provided. Any such
reduction or elimination of earnings could have a material adverse effect on
the Company. Moreover, there is no certainty that the Company will be able to
establish and maintain satisfactory relationships with third party payors, many
of which already have existing provider structures in place and may not be able
or willing to re-arrange their provider networks. Increasingly, some
jurisdictions are taking the position that capitated agreements in which the
provider bears the risk should be regulated by insurance laws. As a
consequence, the Company may be limited in some of the states in which it
operates in its attempt to enter into or arrange capitated agreements for its
affiliated physician practices, employee physicians or medical support service
providers when those capitated arrangements involve the assumption of risk.
Dependence on Physicians and Other Medical Service Providers
The Company is dependent upon its affiliations with physicians and other
medical support service providers. The Company has entered into management
and/or employment agreements with most of its physicians and other medical
service providers for terms ranging from seven to 40 years. A significant
number of the Company's affiliated physicians and other medical service
providers have the right to terminate their contracts before the expiration of
their respective terms. In the event that a significant number of such
physicians or providers terminate their contracts or become unable or unwilling
to continue in their roles, the Company's business could be materially
adversely affected. See "Business."
Potential Liability and Insurance
The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. The Company believes that it does not
engage in the practice of medicine, however, the Company could be implicated in
such a claim through one of its providers, and there can be no assurance that
claims, suits or complaints relating to services delivered by an affiliated
physician or medical service provider will not be asserted against the Company
in the future. Although the Company maintains insurance it believes is adequate
both as to risks and amounts, there can be no assurance that any claim asserted
against the Company for professional or other liability will be covered by, or
will not exceed the coverage limits of, such insurance.
Medical Facility Development
The Company engages in the development of health parks, medical malls and
medical office buildings and, in connection with these projects, enters into
development contracts for the provision of all or some of the following
services: project finance assistance, project management, construction
management, construction design engineering consultation, physician
recruitment, leasing and marketing. Many of these contracts hold the Company
liable for any development cost overruns and also require the Company to
indemnify the owner of the medical facility and the owner of the land on which
a medical facility is developed against certain liabilities or losses. As a
result, the Company, which is not a contractor, enters into construction
contracts with general contractors to construct its projects for a "guaranteed
maximum cost" and requires the general contractors to maintain performance
bonds and to indemnify the Company against certain liabilities and losses. Any
claim for development cost overruns not covered by a performance bond or any
request for indemnification by the owner of the medical facility or the owner
of the land on which a medical facility is developed, if the Company is not
indemnified by others, could have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Medical Facility Development" and "Business--Medical Facility
Development."
8
<PAGE>
Control by Existing Stockholders
On October 28, 1997 all of the Company's executive officers and directors
as a group beneficially owned approximately 36.4% of the outstanding shares of
Common Stock. As a result, such executive officers and directors, should they
choose to act together, will be able to determine the outcome of corporate
actions requiring stockholder approval and to control the election of the
Company's Board of Directors. This ownership may have the effect of
discouraging unsolicited offers to acquire the Company. See "Principal
Stockholders."
Dependence Upon Key Personnel
The Company is dependent upon the ability and experience of its executive
officers, in particular Abraham D. Gosman and Bruce A. Rendina, and there can
be no assurance that the Company will be able to retain all of such officers.
The failure of such officers to remain active in the Company's management could
have a material adverse effect on the Company.
Rights of Holders of the Company's Debentures
On June 26, 1996, the Company completed the debt offering of $100,000,000
aggregate principal amount of its 6-3/4% Convertible Subordinated Debentures due
2003 (the "Debentures") pursuant to an exemption from the registration
requirements of the Securities Act (the "Debt Offering"). The Debentures are
convertible into Common Stock at any time after August 25, 1996 and prior to
redemption or final maturity, initially at a conversion price of $28.20 per
share. The conversion price is subject to adjustment upon the occurrence of
certain events or in certain circumstances. The Debentures were initially
issued under an indenture dated as of June 15, 1996 (the "Indenture"). The
Indenture provides the holders of the Debentures with certain rights that could
affect the market price of the Common Stock and could have the effect of
discouraging a third party from attempting to obtain control of the Company.
In the event of a change in control of the Company, each holder of the
Debentures will have the right, at the holder's option, to require the Company
to repurchase all or a portion of such holder's Debentures at a price equal to
100% of the principal amount thereof, plus accrued interest to the date of
repurchase. Failure by the Company to repurchase the Debentures when required
will result in an Event of Default (as such term is defined in the Indenture).
Upon the occurrence of an Event of Default, the principal and premium, if any,
on the outstanding Debentures may be declared, or may automatically become, due
and payable immediately.
The Company has filed a registration statement on Form S-1 with the
Securities and Exchange Commission relating to the resale of the Debentures and
the resale of the shares of Common Stock initially issuable upon conversion of
the Debentures by any holders of the Debentures that did not purchase the
Debentures under the registration statement. If the registration statement
ceases to be effective or usable for the offer and sale of the Debentures and
such shares of Common Stock for a period of time exceeding 90 days in the
aggregate in any one-year period or 30 days in any calendar quarter, the
Company is required to pay liquidated damages to each holder of the Debentures
or such shares Common Stock.
Shares Eligible for Future Sale
Sales of substantial amounts of Common Stock in the public market during
or after the offering of securities hereby, or otherwise, or the perception
that such sales could occur, may adversely affect prevailing market prices of
the Common Stock and could impair the future ability of the Company to raise
capital through an offering of its equity securities. In connection with the
Initial Public Offering, the Company issued 13,307,450 shares of Common Stock
to certain management and founder stockholders. In addition, in connection with
acquisitions completed through August 31, 1997, the Company issued or agreed to
issue an additional 3,996,610 shares of restricted stock assuming, with respect
to the shares which have yet to be issued, that the issue price (which is based
on the average price of the Common Stock during the five business days
preceeding the issuance) is $15.63, the closing price of the Common Stock on
the Nasdaq National Market on September 22, 1997. All of these shares are
"restricted securities" within the meaning of the Securities Act. Unless the
resale of the shares is registered under the Securities Act, these shares may
not be sold in the open market until after the first anniversary of the date
they were acquired and then only in compliance with the applicable requirements
of Rule 144. In July 1997, the Company
9
<PAGE>
filed a registration statement under the Securities Act registering the resale
of 1,657,560 of such shares of restricted stock. The Company also has granted
rights to the holders of most of the remaining shares of restricted stock to
have their shares registered under the Securities Act.
In connection with the Debt Offering, the Company filed a registration
statement on Form S-1 with the Commission relating to the resale of
$100,000,000 aggregate principal amount of the Debentures, and the resale of up
to 3,546,099 shares of the Common Stock initially issuable upon conversion of
the Debentures by any holders of the Debentures that did not purchase the
Debentures under the registration statement.
Possible Volatility of Stock Price and Limitations on Resale
There can be no assurance that any active public market for the Common
Stock will continue during or after the issuance of securities offered hereby.
From time to time during or after the issuance of securities offered hereby,
there may be significant volatility in the market price for the Common Stock.
Quarterly operating results of the Company, changes in general conditions in
the economy or the health care industry, or other developments affecting the
Company or its competitors could cause the market price of the Common Stock to
fluctuate substantially. The equity markets have, on occasion, experienced
significant price and volume fluctuations that have affected the market prices
for many companies' securities and that have often been unrelated to the
operating performance of these companies. Concern about the potential effects
of health care reform measures has contributed to the volatility of stock
prices of companies in health care and related industries and may similarly
affect the price of the Common Stock. Any such fluctuations that occur during
or after the issuance of the securities offered hereby may adversely affect the
market price of the Common Stock.
Affiliates of companies or practices acquired by the Company who receive
Common Stock under this Prospectus are subject for one year to the restrictions
of Rule 145 under the Securities Act, including the volume of sale limitations
and manner of sale requirements of Rule 145. The requirements of Rule 145 may
limit the ability of such affiliates to resell Common Stock they receive under
this Prospectus.
Potential Loss of Contracts
Although the Company's clinical research study contracts with sponsors
provide that it is entitled to receive fees earned through the date of
termination, as well as all non-cancellable costs, sponsors generally are free
to terminate a clinical trial or the Company's contract related thereto at any
time. The length of a typical clinical trial contract varies from several weeks
to several years. Sponsors may terminate clinical trials for several reasons,
including unexpected results or adverse patient reactions to a potential
product, inadequate patient enrollment or investigator recruitment,
manufacturing problems resulting in shortages of a potential product or
decisions by the sponsor to de-emphasize or terminate a particular trial or
development efforts with respect to a particular potential product. A sponsor's
decision to terminate a trial in which the Company participates could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Government Regulation; Potential Impact of Health Care Reform
Demand for the Company's services is largely a function of the regulatory
requirements associated with the approval of a new drug application imposed by
the United States Food and Drug Administration ("FDA"). These requirements are
more stringent and thus more burdensome than those imposed by many other
developed countries. In recent years, efforts have been made to streamline the
drug approval process and coordinate United States standards with those of
other developed countries. Changes in the level of regulation, including a
relaxation in regulatory requirements or the introduction of simplified drug
approval procedures could have a material adverse effect on the demand for the
Company's clinical trial services. Several competing proposals to reform the
system of health care delivery in the United States have been considered by
Congress from time to time. None of the proposals have been adopted. The
process by which the government will pursue additional or modified proposals
for national health care reform and the precise nature of any such proposals is
unclear at this time. Some of the proposals put forth to date incorporate price
controls on drugs and limits on overall medical spending which may adversely
affect expenditures by the pharmaceutical and biotechnology industries for
research and development, which could have a material adverse effect on the
Company's business, results of operations and financial condition. At present,
it is impossible to predict the effect of any new legislation or changes in
regulatory environment on the Company. The failure of the Company to comply
with applicable regulations could result in the termination
10
<PAGE>
of on-going research or the disqualification of data for submission to
regulatory authorities. Further, the issuance of a notice or finding by the FDA
to either the Company or its clients based upon a material violation by the
Company of either Good Clinical Practices or Good Laboratory Practices could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Potential Liability from Operations
Clinical trials involve the testing of approved and experimental drugs on
human beings. This testing carries with it a significant risk of liability for
personal injury or death to participants resulting from an adverse reaction to,
or improper administration of, the potential product. The Company participates
with sponsors in the selection process. The Company also contracts on behalf of
its customers with physicians who render, and itself renders, professional
services including administering the drugs being tested to participants in
these trials. Consequently, the Company may be subject to claims in the event
of personal injury or death of persons participating in clinical trials and
arising from professional malpractice of physicians with whom it has contracted
and its own employees. Although the Company is generally indemnified by its
clients for such liability, in order for such indemnification to be valid, the
Company and its employees and agents must act within the bounds of specific
procedural requirements governing the conduct of the clinical trial. Since the
value of the Company's indemnification depends on the financial viability of
the indemnifying party, there can be no assurance that the Company will be able
to rely on such indemnification in each instance of potential liability. If the
Company was forced to undertake the defense of, or found financially
responsible for, claims based upon the foregoing or related risks, there could
be a material adverse effect on the Company's business, results of operations
and financial condition.
Validity of Certain Florida Physician Management Contracts
On October 18, 1997, the Florida Board of Medicine, which governs
physicians in Florida, declared that the payment of percentage-based fees by a
physician to a physician practice management company in connection with
practice-enhancement activities subjects a physician to disciplinary action for
a violation of a statute which prohibits fee-splitting. Some of the Company's
contracts with Florida physicians include provisions providing for such
payments. The Company is currently in the process of appealing the ruling to a
Florida District Court of Appeals and the Board has stayed the enforceability of
its ruling pending the appeal. In the event the Board of Medicine's ruling is
eventually upheld, the Company would be forced to renegotiate those contracts
which would be affected by the ruling. While these contracts call for
renegotiation in the event that a provision is not found to comply with state
law, there can be no assurance that the Company would be able to renegotiate
such contracts on acceptable terms. In the event that the Company is unable to
renegotiate a significant number of such contracts on acceptable terms, the
Company's business could be materially and adversely affected.
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on the Nasdaq National Market under the symbol
"PHMX." The following table sets forth for each period indicated the high and
low closing prices for the Common Stock as reported by the Nasdaq National
Market.
<TABLE>
<CAPTION>
High Low
--------- --------
<S> <C> <C>
February 1, 1996 through April 30, 1996 ......... $ 23.63 $ 18.75
May 1, 1996 through July 31, 1996 ............... 25.50 18.25
August 1, 1996 through October 31, 1996 ......... 25.25 16.00
November 1, 1996 through January 31, 1997 ...... 18.88 13.00
February 1, 1997 through April 30, 1997 ......... 16.25 11.00
May 1, 1997 through July 31, 1997 ............... 16.38 11.13
August 1, 1997 through October 31, 1997 .......... 17.00 12.00
</TABLE>
On October 31, 1997, the last reported sale price of the Common Stock
was $14.75. As of October 31, 1997, there were approximately 220 holders of
record of the Company's Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends and does not anticipate paying
cash dividends in the foreseeable future. It is the present intention of the
Board of Directors to reinvest all earnings in the business of the Company to
support future growth.
11
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
(Dollars in thousands, except share data)
The selected historical financial data set forth below have been derived
from the financial statements of the Company. The combined financial statements
of the Company as of December 31, 1994 and December 31, 1995 and for the period
from June 24, 1994 (inception) to December 31, 1994 and the year ended December
31, 1995 and the consolidated financial statements of the Company as of January
31, 1996 and 1997, for the month ended January 31, 1996, the fiscal year ended
January 31, 1997 and the six months ended July 31, 1996 and 1997 (unaudited)
together with the notes thereto and the related report of Coopers & Lybrand
L.L.P., independent accountants, are included elsewhere in this Prospectus. The
selected historical financial data of the Company should be read in conjunction
with the related financial statements and notes thereto appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
Combined Consolidated Consolidated
June 24, 1994 Combined Consolidated Consolidated Six Months Six Months
(Inception) to Year Ended Month Ended Year Ended Ended Ended
December 31, December 31, January 31, January 31, July 31, July 31,
1994 1995 1996(1) 1997 1996 1997
---------------- -------------- -------------- -------------- -------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenue ........................ $ 2,447 $ 70,733 $ 10,715 $ 189,961 $ 77,631 $ 145,647
-------- --------- ----------- ----------- ----------- -----------
Operating expenses:
Cost of affiliated physician
management services ............... -- 9,656 2,797 42,245 17,412 33,535
Salaries, wages and benefits ...... 2,142 31,976 3,637 52,313 23,833 33,812
Depreciation and amortization ...... 107 3,863 535 7,144 3,266 4,533
Rent expense ........................ 249 4,503 565 7,653 3,441 6,521
Earn out payment .................. -- 1,271 -- -- -- --
Provision for closure loss ......... -- 2,500 -- -- -- --
Other .............................. 1,150 23,706 3,515 60,764 21,044 53,534
-------- --------- ----------- ----------- ----------- -----------
Income (loss) from operations ...... (1,201) (6,742) (334) 19,842 8,635 13,712
Interest expense, net ............... 95 4,852 812 1,658 810 1,383
(Income) loss from investments
in affiliates ..................... -- (569) 30 (709) (269) (413)
-------- --------- ----------- ----------- ----------- -----------
Net income (loss) before taxes ...... (1,296) (11,025) (1,176) 18,893 8,094 12,742
Income tax expense (3)................ -- -- -- 6,836 3,032 4,546
======== ========= ----------- ----------- ----------- -----------
Net income (loss) .................... $ (1,296) $ (11,025) $ (1,176) $ 12,057 $ 5,062 $ 8,196
======== ========= =========== =========== =========== ===========
Net income (loss) per share ......... $ (0.08) $ 0.54 $ 0.23 $ 0.34
=========== =========== =========== ===========
Weighted average shares
outstanding ........................ 14,204,305 22,511,448 21,689,631 23,863,289
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, January 31, January 31, July 31, July 31,
1994 1995 1996 1997 1996 1997
-------------- -------------- ------------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital ......... $ 2,590 $ (22,286) $ 44,209 $ 107,465 $131,566 $ 94,604
Accounts receivable, net .. 3,778 20,711 21,562 35,846 29,434 48,950
Total assets ............ 15,408 132,187 180,007 298,124 64,621 323,383
Total debt ............... 1,369 96,941 36,470 111,422 116,503 111,385
Shareholders' equity ...... 11,667 12,678 127,209 148,891 132,813 177,578
</TABLE>
- ----------
(1) The Company was incorporated in October 1995 to combine the business
operations of certain companies (the "Related Companies") controlled by
Abraham D. Gosman, the Company's Chairman and Chief Executive Officer. The
business operations of the Related Companies were acquired from third
parties in transactions completed since September 1994. Simultaneously
with the closing of the Company's initial public offering on January 23,
1996 (the "Initial Public Offering"), the Related Companies were
transferred to the Company in exchange for 13,307,450 shares of the
Company's Common Stock (the "Formation").
(2) In January 1996, the Company changed its fiscal year end from December 31
to January 31.
(3) Provisions for income taxes have not been reflected in the combined
financial statements because there is no taxable income on a combined
basis.
12
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
On October 15, 1997, the Company completed the acquisition of CSL pursuant to
the Merger Agreement dated July 15, 1997. The merger was 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.
13
<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>
14
<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 29,152,416
=========== =============
</TABLE>
15
<PAGE>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Clinical
PhyMatrix Studies Adjustments
Year Ended Year Ended Year Ended
January 31, December 31, January 31, Combined
1997 1996 1997 Pro Forma
--------- ------- ----------- ---------
(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 $ 0.51
----------- ==========
Weighted average number of shares outstanding (I) 22,511,448 27,703,073
=========== ==========
</TABLE>
16
<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>
17
<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>
18
<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 Company's presentation and the
unaudited six months ended July 31, 1997. The audited combined financial
statements of CSL for the years ended December 31, 1995 and 1996 are
included elsewhere in this Prospectus.
19
<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
5,289,127 and 5,191,625 weighted average shares outstanding for CSL at July
31, 1997 and December 31, 1996, respectively.
20
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
See pages F-87 to F-102 for Management's Discussion and Analysis of
Financial Condition and Results of Operations relating to the Company's
supplemental restated financial statements which give retroactive effect to the
CSL Merger which was accounted for as a pooling of interests.
Introduction
The Company is a multispecialty physician management company that provides
management services to the medical community. The Company also develops medical
malls, medical office buildings, and health parks, both for its own account and
for leading hospitals and health systems. The Company's primary strategy is to
develop management networks in specific geographic locations by affiliating
with physicians, medical providers and medical networks. The Company affiliates
with physicians by acquiring their practices and entering into long-term
management agreements with the acquired practices and through the management of
independent physician associations ("IPAs") and specialty care physician
networks by management service organizations ("MSOs") in which the Company has
ownership interests. Where appropriate, the Company supports its affiliated
physicians with related diagnostic and therapeutic medical support services.
The Company's medical support services include radiation therapy, diagnostic
imaging, infusion therapy, home health care, lithotripsy services and
ambulatory surgery. Since its first acquisition in September 1994, the Company
has acquired the practices of and entered into long-term agreements to
affiliate with approximately 360 physicians; has obtained interests in MSOs in
Connecticut, Georgia, New Jersey, New York and Florida that provide management
services to IPAs composed of over 3,600 multispecialty physicians; purchased a
company that provides contract management services to approximately 2,500
physicians in specialty care networks; and acquired several medical support
services companies and a medical facility development company.
In January 1996, the Company changed its fiscal year end from December 31
to January 31.
Physician Practice Acquisitions
Between April and June 1996, the Company purchased the assets of and
entered into employment agreements with Drs. Lawler, Cutler and Surowitz. The
total purchase price for these assets was $2,154,999 in cash and $1,058,400
payable in Common Stock of the Company to be issued during the second quarter
of fiscal year 1998. The Common Stock to be issued is based upon the average
price of the stock during the five business days prior to the issuance. The
value of the Common Stock to be issued has been recorded in other long term
liabilities at January 31, 1997. The purchase price has been allocated to the
assets at their fair market value including goodwill of $2,862,035. The
resulting goodwill is being amortized over 20 years.
During May 1996, the Company purchased the stock of Atlanta
Gastroenterology Associates, P.C. pursuant to a tax free merger and entered
into a 40-year management agreement with the medical practice in exchange for
324,252 shares of Common Stock of the Company having a value of approximately
$6,100,000. The transaction has been accounted for using the
pooling-of-interests method of accounting.
During May 1996, the Company amended its existing management agreement
with Oncology Care Associates and extended the term of the agreement to 20
years. Simultaneously, the Company expanded the Oncology Care Associates
practice by adding three oncologists whose practices the Company acquired for
$609,124. $309,124 of such purchase price was paid in cash and $300,000 was
paid in the form of a convertible note with a maturity in May 1997. The Company
has the option to make such $300,000 payment at its discretion in either cash
or Common Stock of the Company with such number of shares to be based upon the
average price of the stock during the five business days preceding such date.
The purchase price has been allocated to the assets at their fair market value,
including management service agreements of approximately $609,124. The
resulting intangible is being amortized over 20 years.
During May and June 1996, the Company entered into agreements to purchase
the assets of and entered into 20-year management agreements with two physician
practices consisting of three physicians. These practices are located in South
Florida and Washington, D.C. The total purchase price for the assets of these
practices was $1,214,291. Of this amount, $663,667 was paid in cash and
$550,954 of such purchase price is payable in Common Stock of the Company to be
issued during May and June 1997. The number of shares of Common Stock of the
Company to be issued is based upon the average price of the stock during the
five business days prior to the issuance.
21
<PAGE>
The value of the Common Stock to be issued has been recorded in other long term
liabilities at January 31, 1997. The purchase price has been allocated to the
assets at their fair market value, including management service agreements of
$749,646. The resulting intangible is being amortized over 20 years.
During July 1996, the Company purchased the assets of and entered into a
20-year management agreement with four physicians in Florida. The purchase
price for these assets was approximately $948,610, which was paid in cash. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $328,838. The resulting intangible
is being amortized over 20 years.
During July 1996, the Company purchased the assets of and entered into a
20-year management agreement with three urologists in Atlanta, Georgia. The
purchase price for these assets was $755,163. Of such purchase price, $475,163
was paid in cash and $280,000 is payable during July 1997 in Common Stock of
the Company with such number of shares to be based upon the average price of
the stock during the five business days prior to the issuance. The value of the
Common Stock to be issued has been recorded in other long term liabilities at
January 31, 1997. The purchase price has been allocated to these assets at
their fair market value, including management service agreements of
approximately $399,974. The resulting intangible is being amortized over 20
years.
During August 1996, the Company purchased the assets of and entered into a
management agreement with Atlantic Pediatrics. The purchase price for these
assets was $412,539. Simultaneous with the closing, Atlantic Pediatrics was
merged into Osler Medical, Inc. During the second quarter of 1996, the Company
also acquired certain copyright and trademark interests for a purchase price of
$887,000. The total purchase price for the assets acquired was allocated to
such assets at their fair market value, including management service agreements
of $1,215,074. The resulting intangible is being amortized over 20 years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with eight physicians in Florida. The purchase
price for these assets was $3,439,331. Of such purchase price, $1,519,331 was
paid in cash and $1,920,000 is payable during August 1997 in Common Stock of
the Company with such number of shares to be purchased based upon the average
price of the stock during the five business days prior to the issuance. The
value of the Common Stock to be issued has been recorded in other long term
liabilities at January 31, 1997. The purchase price has been allocated to these
assets at their fair market value, including management service agreements of
$2,625,699. The resulting intangible is being amortized over 40 years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with four physicians in Georgia. The purchase
price for these assets was $1,548,756. Of such purchase price, $855,956 was
paid in cash and $692,800 is payable during August 1997 in Common Stock of the
Company with such number of shares to be purchased based upon the average price
of the stock during the five business days prior to the issuance. The value of
the Common Stock to be issued has been recorded in other long term liabilities
at January 31, 1997. The purchase price has been allocated to these assets at
their fair market value, including management service agreements of $1,116,259.
The resulting intangible is being amortized over 40 years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with 10 physicians in Florida. The purchase price
for these assets was $3,294,499. Of such purchase price, $920,099 was paid in
cash and $2,374,400 is payable during August 1997 in Common Stock of the
Company with such number of shares to be purchased based upon the average price
of the stock during the five business days prior to the issuance. The value of
the Common Stock to be issued has been recorded in other long term liabilities
at January 31, 1997. The purchase price has been allocated to these assets at
their fair market value, including management service agreements of $3,161,192.
The resulting intangible is being amortized over 40 years.
During October 1996, the Company purchased the assets of and entered into
20-year management agreements with five physicians in Florida. The purchase
price for these assets was $1,341,521. Of such purchase price $806,521 was paid
in cash and $535,000 is payable during October 1997 in Common Stock of the
Company with such number of shares to be purchased based upon the average price
of the stock during the five business days prior to the issuance. The value of
the Common Stock to be issued has been recorded in other long term liabilities
at January 31, 1997. The purchase price has been allocated to these assets at
their fair market value, including management service agreements of $670,000.
The resulting intangible is being amortized over 20 years.
During January 1997, the Company purchased the stock of Atlanta
Specialists in Gastroenterology pursuant to a merger and entered into a 40-year
management agreement with the medical practice in exchange for 108,393
22
<PAGE>
shares of Common Stock of the Company having a value of approximately
$1,578,205. The transaction was accounted for using the pooling-of-interests
method of accounting.
During January 1997, the Company purchased the assets of and entered into
a 40-year management agreement with 14 physicians in Texas. The purchase price
for these assets was $6,029,272. Of such purchase price, $2,333,272 was paid in
cash and $3,696,000 is payable during January 1998 in Common Stock of the
Company with such number of shares to be purchased based upon the average price
of the stock during the five business days prior to the issuance. The value of
the Common Stock to be issued has been recorded in other long-term liabilities
at January 31, 1997. The purchase price has been allocated to these assets at
their fair market value, including management service agreements of $4,640,493.
The resulting intangible is being amortized over 40 years.
During January 1997, the Company purchased the assets of and entered into
a 40-year management agreement with 18 physicians in Florida. The purchase
price for these assets was $4,500,652. Of such purchase price, $2,273,613 was
paid in cash, $1,500,000 of bank debt was assumed and 42,830 shares of Common
Stock were issued having a value of $727,039. The purchase price has been
allocated to these assets at their fair market value, including management
service agreements of $3,814,400. The resulting intangible is being amortized
over 40 years.
During February 1997, the Company purchased the stock of a six physician
practice pursuant to a merger and entered into a 40-year management agreement
with the practice in exchange for 159,312 shares of Common Stock of the Company
having a value of approximately $2,440,000. The transaction has been accounted
for using the pooling-of-interests method of accounting.
During February 1997, the Company purchased the assets of and entered into
a 40-year management agreement with five physicians in Utah. The purchase price
was $2,498,148. Of such purchase price, $1,378,148 was paid in cash and 75,293
shares of Common Stock of the Company were issued having a value of $1,120,000.
The purchase price has been allocated to the assets at their fair market value,
including management service agreements of $1,499,013. The resulting intangible
is being amortized over 40 years.
During May 1997, the Company entered into a 40-year management agreement
with a radiation therapy center in Westchester, New York. The purchase price
was $2,550,000. Of such purchase price $1,200,000 was paid in cash and
$1,350,000 is payable during May 1998 in Common Stock of the Company with such
number of shares to be issued based upon the average price of the stock during
the five business days prior to the issuance. The value of the Common Stock to
be issued has been recorded in other long-term liabilities at July 31, 1997.
The purchase price has been allocated to management service agreements and is
being amortized over 40 years.
During July 1997, the Company entered into a management services agreement
with Beth Israel Hospital to manage its DOCS Division which consists of more
than 100 physicians located throughout the greater Metropolitan New York area.
In addition, the Company and Beth Israel Hospital will be completing the
formation of an MSO to manage the medical risk contracting to the more than
2,000 physicians affiliated with Beth Israel Hospital and its parent
corporation. The Management Services Agreement became effective July 1, 1997,
and will remain in effect for 40 years, contingent upon the closing of the MSO
joint venture prior to January 15, 1998. The Company has committed up to $40
million in conjunction with the transaction to be utilized for the expansion of
the Beth Israel delivery system throughout the New York region. In connection
with the agreement, the Company paid $13,560,000 in cash, which was allocated
to management service agreements and is being amortized over 40 years.
Accounting Treatment
The Company's relationships with its affiliated physicians are set forth
in various asset and stock purchase agreements, management service agreements,
and employment and consulting agreements. Through the asset and/or stock
purchase agreement, the Company acquires the equipment, furniture, fixtures,
supplies and, in certain instances, service agreements, of a physician practice
at the fair market value of the assets. The accounts receivable are typically
purchased at the net realizable value. The purchase price of the practice
generally consists of cash, notes and/or Common Stock of the Company and the
assumption of certain debt, leases and other contracts necessary for the
operation of the practice. The management services or employment agreements
delineate the responsibilities and obligations of each party.
Net revenues from management service agreements include the revenues
generated by the physician practices. The Company is responsible and at risk
for the operating costs of the physician practices. Expenses include the
23
<PAGE>
reimbursement of all medical practice operating costs and all payments to
physicians (which are reflected as cost of affiliated physician management
services) as required under the various management agreements. For providing
services under management services agreements entered into prior to April 30,
1996, physicians generally receive a fixed percentage of net revenue of the
practice. "Net revenues" is defined as all revenue computed on an accrual basis
generated by or on behalf of the practice after taking into account certain
contractual adjustments or allowances. The revenue is generated from
professional medical services furnished to patients by physicians or other
clinicians under physician supervision. In several of the practices, the
Company has guaranteed that the net revenues of the practice will not decrease
below the net revenues that existed immediately prior to the agreement with the
Company. Under management services agreements entered into after April 30,
1996, the physicians receive a portion of the operating income of the practice
which amounts vary depending on the profitability of the practice. Net revenues
under management services agreements for the six months ended July 31, 1997 and
the year ended January 31, 1997 were $75.7 million and $90.2 million,
respectively.
Medical Support Service Companies Acquisitions
During October 1996, the Company purchased the assets of an outpatient
ambulatory surgical center in Florida. The Company entered into a lease whereby
the surgical center was leased to a partnership with an initial term of 15
years. In addition, the Company entered into a 20-year management agreement
pursuant to which the Company receives a management fee which is based upon the
performance of the surgical center. The purchase price for these assets was
$3,531,630 plus the assumption of debt of $1,223,625 which consisted of
$717,557 in a mortgage payable and $506,068 in capital leases. The purchase
price has been allocated to the assets at their fair market value, including
management service agreements of $2,597,409. The resulting intangible is being
amortized over 20 years.
During June 1997, the Company purchased the assets of two diagnostic
imaging centers in Dade County, Florida. The purchase price was approximately
$12,500,000 plus the assumption of debt and capital leases totaling $1,570,078.
Of such purchase price, $500,000 was paid in cash and the remaining $12,000,000
was paid by the issuance of 773,026 shares of Common Stock of the Company,
562,500 of which were issued in June and 210,526 of which were issued in
September. The purchase price was allocated to the assets at their fair market
value, including goodwill of $10,180,273. The resulting intangible is being
amortized over 30 years.
During June 1997, the Company acquired the remaining 20% interest in a
lithotripsy company that it purchased during 1994. The interest was acquired in
exchange for cash and 54,500 shares of Common Stock of the Company having a
total value of $2,005,000. The purchase price was allocated to goodwill and is
being amortized over 20 years.
During June 1997, the Company issued 100,002 shares of Common Stock of the
Company having a value of approximately $1,500,000 to the former shareholders
of Pinnacle Associates, Inc. ("Pinnacle"). The issuance of the shares
represented the merger consideration for Pinnacle which was purchased during
1995.
Management Services Organizations and Contract Management Acquisitions
During December 1995, the Company obtained a 43.75% interest in Physicians
Choice Management, LLC, an MSO that provides management services to an IPA
composed of over 375 physicians based in Connecticut. The Company acquired this
interest in exchange for a payment of $1.5 million to the MSOs shareholders
($1.0 million paid during 1995 and $.5 million paid during the second quarter
of 1996) and a capital contribution of $2.0 million to the MSO ($1.5 million
paid during 1995 and $.5 million paid during the second quarter of 1996). In
addition, upon the closing of the Company's initial public offering in January
1996, the Company granted options to purchase 300,000 shares of Common Stock to
certain MSO employees in conjunction with their employment agreements. These
options vest over a two-year period with the exercise price equaling the fair
market value of the Company's stock on the date such shares become exercisable.
During September 1996, the Company acquired the remaining 56.25% ownership
interest in the MSO. The Company acquired the remaining interests in exchange
for a payment of $1,000,000 in cash plus 363,442 shares of Common Stock of the
Company. The Company also committed to loan the MSO's selling shareholders
$2,800,000 to pay the tax liability related to the sale. As of January 31, 1997
$2,253,000 of the loan amount committed had been advanced to the selling
shareholders by the Company. The total purchase price for the 100% interest was
approximately $12,148,822 and has been allocated to these assets at their fair
market value including goodwill of $12,099,111. The resulting intangible is
being amortized over 40 years.
24
<PAGE>
During April 1996, the Company purchased a 50% interest in Central Georgia
Medical Management, LLC, an MSO that provides management services to an IPA
composed of 45 physicians based in Georgia. The Company acquired this interest
in exchange for a payment of $550,000 to existing shareholders and a capital
contribution of $700,000 to the MSO. The Company's balance sheet as of January
31, 1997 includes the 50% interest not owned by the Company as minority
interest. The owners of the other 50% interest in the MSO have a put option to
the Company to purchase their interests. This put option vests over a four year
period. The price to the Company to purchase these interests equals 40% of the
MSOs net operating income as of the most recent fiscal year multiplied by the
price earnings ratio of the Company. The minimum price earnings ratio used in
such calculation will be 4 and the maximum 10.
During September 1996, the Company purchased an 80% interest in New Jersey
Medical Management, LLC, an MSO that provides management services to an IPA
with more than 450 physicians in New Jersey. The Company acquired this interest
in exchange for a payment of $350,000 to existing shareholders. The Company's
balance sheet at January 31, 1997 includes the 20% interest not owned by the
Company as minority interest.
During September 1996, the Company purchased the stock of Physicians
Consultant and Management Corporation ("PCMC"), a company based in Florida that
provides the managed health care industry with assistance in provider
relations, utilization review and quality assurance. The base purchase price
for the stock was $2,000,000 with $1,000,000 paid on the closing date and
$1,000,000 paid during February 1997. There is also a contingent payment up to
a maximum of $10,000,000 based on PCMC's earnings before taxes during the next
five years which will be paid in cash and/or Common Stock of the Company. The
purchase price has been allocated to the assets at their fair market value
including goodwill of approximately $3,078,568. The resulting intangible is
being amortized over 30 years.
During November 1996, the Company established New York Network Management,
L.L.C. ("Network"), which is 51% owned by the Company, to purchase the assets
and stock of various entities which comprise Brooklyn Medical Systems ("BMS").
BMS arranges for the delivery of health care services to members through
affiliations with more than 600 physicians in the New York City area. The base
purchase price for Network was $1,200,000 and an additional payment not
exceeding $1,000,000 may be required to be made during the next three years if
certain pre-tax earnings thresholds are achieved. The Company has committed to
fund approximately $2,400,000 to Network during the next three years. Such
advances can be in the form of a demand loan or for additional ownership
interests if the other owners do not elect to contribute their pro-rata share
of any additional capital contribution ($100,000 of additional capital
contribution for an additional 1% interest) in Network. During the first three
years the Company has the option to purchase up to an additional 29% ownership
interest. During years four and five the owners of 29% of Network have the
right to require the Company to purchase their interests at the option price.
During April 1997, the Company acquired a pulmonary physician network
company for a base purchase price of $2,966,058. Of such purchase price,
$673,211 was paid in cash and 180,717 shares of Common Stock of the Company
were issued during May having a value of $2,292,847. There is also a contingent
payment up to a maximum of $2,000,000 based on the acquired entities' earnings
before taxes during the next three years which will be paid in cash and/or
Common Stock of the Company. The purchase price was allocated to management
service agreements and is being amortized over 30 years.
Year Ended December 31, 1995
Physician Practice Acquisitions
During the year ended December 31, 1995, the Company purchased the assets
of several physician practices and in conjunction with those purchases entered
into employment agreements with 14 physicians in Florida. The total purchase
price for these assets was $4,158,875. The purchase price was allocated to
these assets at their fair market value, including goodwill of $3,093,946. The
resulting goodwill is being amortized over 20 years.
During the year ended December 31, 1995, the Company purchased the assets
of and entered into management service agreements with Oncology-Hematology
Associates, P.A. and Oncology-Hematology Infusion Therapy, Inc.; Georgia Cancer
Specialists, Inc.; Osler Medical, Inc.; Oncology Radiation Associates, P.A.;
West Shore Urology; Whittle, Varnell and Bedoya, P.A.; Oncology Care
Associates; Venkat Mani; and Symington, consisting of an aggregate of 79
physicians including 45 oncologists. The total purchase price for these assets
was $23,425,190 in
25
<PAGE>
cash. In connection with these acquisitions the Company also entered into a
15-year capital lease with a total obligation of $1,569,171 and assumed debt of
$6,893,609. The purchase price for the practices' assets was allocated to
assets at their fair market value, including management service agreements of
$18,814,763. The resulting intangible is being amortized over the life of the
management agreements which range from ten to 20 years.
Medical Support Service Companies Acquisitions
During March 1995, the Company acquired by merger all of the outstanding
shares of stock of Oncology Therapies, Inc. (formerly known as Radiation Care,
Inc. and referred to herein as "OTI") for $2.625 per share. OTI owns and
operates outpatient radiation therapy centers utilized in the treatment of
cancer and diagnostic imaging centers. The total purchase price for the stock
was approximately $41,470,207 (not including transaction costs and 26,800
shares initially subject to appraisal rights). During April 1995, the Company
purchased from Aegis Health Systems, Inc. for $7,163,126 all of the assets used
in its lithotripsy services business. During November 1995 the Company acquired
by merger Pinnacle, an Atlanta, Georgia infusion therapy services company. The
merger consideration in connection with the Pinnacle merger was paid in June
1997. The purchase price for these acquisitions was allocated to assets at
their fair market value including goodwill of $19,235,818. The resulting
intangibles are being amortized over 20 to 40 years.
Medical Facility Development Acquisitions
On May 31, 1995, Abraham D. Gosman, Chairman of the Board and Chief
Executive Officer of the Company ("Mr. Gosman") purchased a 50% ownership
interest in DASCO Development Corporation and DASCO Development West, Inc.
(collectively, "DASCO"), a medical facility development services company
providing such services to related and unrelated third parties in connection
with the development of medical malls, health parks and medical office
buildings. The purchase price consisted of $5.2 million in cash and $4.6
million in notes, which were guaranteed by Mr. Gosman. Upon the closing of the
Company's initial public offering, Mr. Gosman, Donald A. Sands and Bruce A.
Rendina, the Company's principal promoters, and certain management and founder
stockholders exchanged their ownership interests in DASCO for shares of Common
Stock equal to a total of $55 million or 3,666,667 shares. The Company believes
that its medical facility development services and project finance strategy are
a significant component of the Company's overall business strategy. The
historical book value of Messrs. Sands and Rendina's interest in DASCO is
$22,735. The initial 50% purchase price was allocated to assets at their fair
market value, primarily goodwill of $9.8 million with the exchange recorded at
historical value. At December 31, 1995, the acquisition of the 50% interest in
DASCO was being accounted for using the equity method.
Period June 24, 1994 (inception) to December 31, 1994 Acquisitions
Medical Support Service Companies Acquisitions
During September 1994, an 80% owned subsidiary of the Company purchased
substantially all of the assets of Uromed Technologies, Inc. ("Uromed"), a
provider of lithotripsy services in Florida, for a purchase price of $3,141,535
plus the assumption of capital lease obligations of $1,097,614. The Company
acquired the outstanding 20% interest in the subsidiary during June 1997.
During November 1994, the Company purchased 80% of the stock of Nutrichem, Inc.
("Nutrichem"), an infusion therapy company doing business in Maryland, Virginia
and the District of Columbia, for $3,528,704 in cash and a contingent note in
the amount of $6,666,667, subject to adjustments. A charge of $1,271,000
related to this contingent note was recorded during the year ended December 31,
1995. The remaining $5,395,667 was allocated to goodwill at December 31, 1995
and is being amortized. Subsequent to its initial public offering, the Company
acquired the outstanding 20% interest in Nutrichem in exchange for 266,666
shares of Common Stock resulting in additional purchase price of $4,000,000.
During November 1994, the Company acquired all of the assets and assumed
certain liabilities of First Choice Health Care Services of Ft. Lauderdale,
Inc., First Choice Health Care Services, Inc. and First Choice Home Care
Services of Boca Raton, Inc., home health care companies doing business in
Florida, for a total purchase price of $2,910,546 in cash plus the assumption
of $225,000 in debt. The purchase price for these acquisitions was allocated to
assets at their fair market value, including goodwill of $14,818,145. The
resulting intangibles are being amortized over 20 to 40 years.
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During December 1994, the Company purchased a 36.8% partnership interest
in Mobile Lithotripter of Indiana Partners, a provider of lithotripsy services
in Indiana, from Mobile Lithotripter of Indiana, Limited, for $2,663,000 in
cash. This investment is being accounted for by the equity method.
Results of Operations
Three 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 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
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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, through its investment in DASCO, provides medical facility
development services to related and unrelated third parties in connection with
the establishment of health parks, medical malls and medical office buildings.
The Company believes that the development of such facilities, in certain
markets, will aid in the integration of its affiliated physicians and medical
support services and will provide future opportunities to affiliate with
physicians and acquire future physician practices or support services. Further,
the Company believes that the development of health parks, medical malls and
medical office buildings in certain markets will aid in the integration of its
affiliated physicians and medical support services.
The Company derives its medical facility development service revenues from
the provision of a variety of services. In rendering such services, the Company
generates income without bearing the costs of construction, expending
significant capital or incurring substantial indebtedness. Net revenues from
medical facility development are recognized at the time services are performed.
In some cases fees are earned upon the achievement of certain milestones in the
development process, including the receipt of a building permit and a
certificate of occupancy of the building. Unearned revenue relates to all fees
received in advance of services being completed on development projects.
The Company typically receives the following compensation for its
services: development fees (including management of land acquisition,
subdivision, zoning, surveying, site planning, permitting and building design),
general contracting management fees, leasing and marketing fees, project cost
savings income (based on the difference between total budgeted project costs
and actual costs) and consulting fees.
The amount of development fees and leasing and marketing fees are stated
in the development and marketing agreements. Those agreements also provide the
basis for payment of the fees. The financing fees and consulting fees are
generally not included in specific agreements but are negotiated and disclosed
in project pro formas provided to the owners of the buildings and hospital
clients. Specific agreements usually incorporate those pro formas and provide
that the projects will be developed in conformity therewith. General
contracting management fees and project cost savings income are included in
guaranteed maximum cost contracts entered into with the general contractor.
These contracts are usually approved by the owners which in many cases include
hospital clients and prospective tenants. During the 1997 Period, the Company's
medical facility development generated revenues of $10.4 million and pretax
income of $6.5 million.
Results of Operations
Year Ended January 31, 1997 Compared to the Year Ended December 31, 1995
The following discussion reviews the results of operations for the year
ended January 31, 1997 ("1997"), compared to the year ended December 31, 1995
("1995"), respectively.
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Revenues
The Company derives revenues from health care services and medical
facility development services. Within the health care segment, the Company
distinguishes between revenues from cancer services, non-cancer physician
services and other medical support services. Cancer services include physician
practice management services to oncology practices and certain medical support
services, including radiation therapy, diagnostic imaging and infusion therapy.
Non-cancer physician services primarily included physician practice management
services to all practices managed by the Company other than oncology practices
and administrative services to health plans which includes reviewing,
processing and paying claims and subcontracting with specialty care physicians
to provide covered services. Other medical support services include home health
care services, lithotripsy, various healthcare management services and
ambulatory surgery.
Net revenues were $190.0 million during 1997. Of this amount, $95.0
million or 50.0% of such revenues was attributable to cancer services; $55.4
million or 29.1% was related to non-cancer physician services; $20.6 million or
10.9% of such revenues was attributable to other medical support services; and
$19.0 million or 10.0% related to medical facility development. At January 31,
1997, the Company had affiliations with 226 physicians.
Net revenues were $70.7 million during 1995. Of this amount, $44.9 million
or 63.5% of such revenues was attributable to cancer services; $7.7 million or
10.9% related to non-cancer physician services; and $18.1 million or 25.6%
related to other medical support services. At December 31, 1995, the Company
had affiliations with 103 physicians.
Expenses
The Company's cost of affiliated physician management services was $42.2
million or 46.8% of net revenue from management service agreements during 1997.
The cost of affiliated physician management services was $9.7 million or 43.3%
of net revenue from management service agreements during 1995. Net revenue for
these managed physician practices was $90.2 million during 1997 and $22.4
million during 1995, respectively. The cost of affiliated physician management
services as a percentage of net revenue from management services will vary
based upon the type of physician practices.
The Company's salaries, wages and benefits increased by $20.3 million from
$32.0 million or 45.2% of net revenues during 1995 to $52.3 million or 27.5% of
net revenues during 1997. The decrease as a percentage of net revenues is
primarily attributable to the fact that since the Company's commencement of
operations during the third quarter of 1994, it has been able to spread its
salaries, wages and benefits over a rapidly expanding revenue base.
The Company's supplies expense increased by $15.1 million from $11.8
million or 16.8% during 1995 to $26.9 million or 14.2% during 1997. The
increase in supplies expense is primarily a result of the acquisition of
additional physician practices. The supplies expense as a percentage of net
revenues will vary based upon the type of physician practices.
The Company's depreciation and amortization expense increased by $3.3
million from $3.8 million or 5.5% of net revenues during 1995 to $7.1 million
or 3.8% of net revenues during 1997. The increase primarily is a result of the
acquisitions completed during 1997 and the allocation of the purchase prices as
required per purchase accounting. One of the reasons for the decrease as a
percentage of net revenues is a result of the increased revenues during 1997
from the entities previously acquired.
The Company's rent expense increased by $3.2 million from $4.5 million or
6.4% of net revenues during 1995 to $7.7 million or 4.0% of net revenues during
1997. Rent and lease expenses as a percentage of net revenue will vary based on
the size of each of the affiliated practice offices, the number of satellite
offices and the current market rental rate for medical office space in the
particular geographic markets.
The Company's provision for closure loss of $2.5 million during 1995
represents a charge for the writedown of assets to their estimated fair market
value and a reserve for the remaining lease obligation at two radiation therapy
centers that were acquired by the Company in March 1995 and subsequently
closed.
The Company's earn-out payment during 1995 of $1.3 million represents a
payment to Nutrichem on the contingent note entered into in conjunction with
the acquisition of Nutrichem. During 1997 the Company sold its Nashville
radiation therapy center to a third party for $1.5 million which resulted in a
gain on sale of approximately
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$260,000. In addition, during 1997 the Company recorded a charge of $250,000
related to the termination of an employment agreement with a physician. These
two nonrecurring items have been included in other expenses on the statement of
operations for 1997.
The Company's net interest expense decreased by $3.2 million from 1995 to
1997. Interest income of $4.1 million was earned during 1997, primarily on the
remaining proceeds from the Company's initial public offering and Convertible
Subordinated Debenture offering.
No income tax provision was required during 1995 due to the Company's tax
loss and the inability of the Company to use the benefits which prior to the
completion of the initial public offering primarily accrued to Mr. Gosman.
Medical Facility Development
The Company provides medical facility development services to related and
unrelated third parties in connection with the establishment of health parks,
medical malls and medical office buildings. The amount of development fees and
leasing and marketing fees are stated in the development and marketing
agreements. Those agreements also provide the basis for payment of the fees.
The financing fees and consulting fees are generally not included in specific
agreements but are negotiated and disclosed in project pro formas provided to
the owners of the buildings and hospital clients. Specific agreements usually
incorporate those pro formas and provide that the projects will be developed in
conformity therewith. General contracting management fees and project cost
savings income are included in guaranteed maximum cost contracts entered into
with the general contractor. These contracts are usually approved by the owners
which in many cases include hospital clients and prospective tenants. During
1997, the Company's medical facility development business generated revenues of
$19.0 million and operating income of $11.1 million.
Year Ended December 31, 1995 Compared to Period from June 24, 1994 to December
31, 1994
The following discussion reviews the historical results of operations for
the year ended December 31, 1995 ("1995") and the period from June 24, 1994 to
December 31, 1994 (the "1994 Period").
All of the entities acquired by the Company were acquired subsequent to
June 23, 1994. As a result of such acquisitions, the Company believes that any
period to period comparisons and percentage relationships within periods are
not meaningful.
Revenues
Net revenues of $2.4 million for the 1994 Period include revenues from the
acquisitions completed during the period September through December 1994. Of
this amount, $.7 million or 28% of such revenues was attributable to cancer
services; and $1.7 million or 72% of such revenues was attributable to other
medical support services. The Company had no physician related revenues during
this period.
Net revenues of $70.7 million for 1995 include revenues from the
acquisitions completed during the period June 24, 1994 to December 31, 1995.
Such revenues during 1995 consisted of $44.9 million or 63% related to cancer
services; $7.7 million or 11% related to non-cancer physician services; and
$18.1 million or 26% related to other medical support services. As of December
31, 1995, the Company had affiliations with 55 physicians providing cancer
related services, 14 employed primary care physicians, and 34 other multigroup
of specialty physicians.
Expenses
For the 1994 Period and for 1995, total operating and administrative
expenses were $3.7 million and $77.5 million, respectively. In the 1994 Period
and 1995, operating and administrative expenses exceeded revenues due to the
commencement of operations of the Company. No income tax provision was required
due to the Company's tax loss and the inability of the Company to use the
benefits which prior to the completion of the initial public offering primarily
accrued to Mr. Gosman.
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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.
In September 1997, the Company entered into a secured credit agreement
with a bank providing for a $100 million revolving line of credit for working
capital and acquisition purposes. The credit agreement (i) prohibits the
payment of dividends by the Company, (ii) limits the Company's ability to incur
indebtedness and make acquisitions except as permitted under the credit
agreement and (iii) requires the Company to comply with certain financial
covenants.
The Company expects that its existing working capital of $94.6 million
(which includes cash of $58.6 million) plus amounts available under its line of
credit will be adequate to satisfy the Company's cash requirements for the next
12 months. However, there can be no assurance that the Company will not be
required to seek additional financing during this period. The failure to raise
the funds necessary to finance its future cash requirements would adversely
affect the Company's ability to pursue its strategy and could adversely affect
its results of operations for future periods.
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BUSINESS
General
The Company is a multi-specialty physician management company that
provides management services to the medical community. The Company also
develops medical malls, medical office buildings and health parks, both for its
own account and for leading hospitals and health systems. The Company's primary
strategy is to develop management networks in specific geographic locations by
affiliating with physicians, medical providers, and medical networks. The
Company affiliates with physicians by acquiring their practices and entering
into long-term management agreements with the acquired practices and through
the management of independent physician associations ("IPAs") and specialty
care physician networks by management service organizations ("MSOs") in which
the Company has ownership interests. Where appropriate, the Company supports
its affiliated physicians with related diagnostic and therapeutic medical
support services. The Company's medical support services include radiation
therapy, diagnostic imaging, infusion therapy, home health care, lithotripsy
services and ambulatory surgery. Since its first acquisition in September 1994,
the Company has acquired the practices of and entered into long term agreements
to affiliate with approximately 360 physicians; has obtained interests in MSOs
in Connecticut, Georgia, New Jersey, New York and Florida that provide
management services to IPAs composed of over 3,600 multi-specialty physicians;
purchased a company that provides contract management services to approximately
2,500 physicians in specialty care networks; and acquired several medical
support service companies and a medical facility development company.
The Company believes that its strategy of developing management networks
in specific geographic locations creates synergies, achieves operating
efficiencies and responds to the cost-containment initiatives of payors,
particularly managed care companies. To date, the Company has acquired the
practices of and affiliated with 70 oncologists and provides comprehensive
cancer-related support services including radiation therapy, infusion therapy
and diagnostic imaging. The Company has contracts with managed care
organizations under which the Company and its affiliated physicians provide
cancer-related health care services to over 230,000 covered lives. In addition,
through management of contracts with 2,500 physicians the Company facilitates
the delivery of specialty health care services to approximately 7,300,000
member patients. The Company plans to continue to increase its managed care
capabilities into additional specialty care physician networks and to expand
existing relationships with established managed care organizations. The Company
also intends to develop additional disease management networks for the
treatment of other chronic illnesses such as diabetes, cardiovascular diseases
and infectious diseases.
In certain targeted markets, the Company organizes its affiliated
physicians and related medical support services into integrated clusters of
disease specialty and primary care networks, which it terms local provider
networks ("LPNs"). LPNs are designed to provide a comprehensive range of
physician and medical support services within specific geographic regions. The
Company believes that its LPN structure achieves operating efficiencies and
enhances its ability to secure contracts with managed care organizations. To
date, the Company is developing LPNs in each of the Florida, Atlanta,
Washington, D.C./Baltimore areas and the tri-state area of Connecticut, New
York and New Jersey.
As part of its strategy to integrate physician practices, the Company
provides medical facility development services to related and unrelated third
parties for the development of health parks, medical malls and medical office
buildings. Such services include project finance assistance, project
management, construction management, construction design engineering, physician
recruitment, leasing and marketing. While the Company incurs certain
administrative and other expenses in the course of providing such services, it
does not incur costs of construction or risks of project ownership. The
Company's strategy in financing its projects is to involve future tenants as
significant investors in and owners of the developed medical facilities.
Because most of its tenants are physicians and medical support service
companies, the Company believes that the relationships that it develops with
these parties through its medical facility development efforts also enhances
the Company's ability to affiliate with physicians and acquire physician
practices and medical support service companies. Further, the Company believes
that the development of health parks, medical malls and medical office
buildings in certain markets will aid in the integration of its affiliated
physicians and medical support services.
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Recent Developments
On October 15, 1997, the Company completed the acquisition of Clinical
Studies, Ltd. ("CSL") pursuant to the Amended and Restated Agreement and Plan
of Merger (the "Merger Agreement") dated as of July 15, 1997 by and among the
Company, CSL, PhyMatrix Acquisition I, Inc., a Delaware corporation ("PhyMatrix
Acquisition"), Dr. Michael Rothman, Dr. Walter Brown, Michael T. Heffernan and
Ronald Phillips as Trustee of The Alexander Rothman 1993 Qualified Sub-Chapter
S Trust and as Trustee of The Julie Rothman 1993 Qualified Sub-Chapter S Trust.
Pursuant to the Merger Agreement, PhyMatrix Acquisition, a wholly-owned
subsidiary of PhyMatrix, merged with and into CSL (the "Merger"), and CSL
became a wholly-owned subsidiary of PhyMatrix. The purchase price for CSL
consisted of an aggregate of 5,204,305 shares of the Company's common stock
(the "Shares") plus certain costs and expenses assumed in the Merger. The
Company has agreed to register under the Securities Act of 1933, as amended,
the resale of the Shares acquired by the former shareholders of CSL in the
Merger.
CSL is a multi-therapeutic site management organization ("SMO") based in
Providence, Rhode Island providing clinical investigative site management
services to 22 research facilities in 11 states. CSL wholly-owns and centrally
manages Phase I-IV research facilities conducting clinical trials for
pharmaceutical companies and contract research organizations ("CROs"). CROs are
independent companies that assist pharmaceutical and biotechnology companies
with the complex and multi-stage drug regulatory process. Although CSL has
conducted and continues to conduct clinical research in a wide variety of
therapeutic areas, the company's focus historically has been in trials in the
therapeutic areas of the central nervous system, geriontology, women's health
and endocrinology.
In connection with the Merger, the management of the Company has agreed to
recommend Michael T. Heffernan, the Chief Executive Officer of CSL, for
election to the Board of Directors of the Company, and the Company and Mr.
Heffernan have entered into an employment agreement, dated October 15, 1997,
relating to Mr. Heffernan's continued employment as Chief Executive Officer of
CSL.
The Merger has been accounted for as a pooling of interests. Accordingly,
the financial statements of the Company for all periods prior to the effective
date of the Merger have been restated to include CSL and Clinical Marketing,
Ltd., which was merged into CSL on January 1, 1997. The restated supplemental
financial statements of the Company are included elsewhere in this Prospectus
together with Management's Discussion and Analysis of Financial Condition and
Results of Operations relating to such restated supplemental financial
statements. Also included elsewhere in this Prospectus are certain historical
financial statements of CSL and certain pro forma financial information which
give effect to the Merger.
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 notes
which are convertible into Common Stock.
Industry
Overview
The Health Care Financing Administration estimates that health care
spending in 1995 exceeded $1 trillion with more than $240 billion directly
attributable to physician services. Increasing concern over the cost of health
care in the United States has led to numerous initiatives to contain the growth
of health care expenditures, particularly in the government entitlement
programs of Medicare and Medicaid. These concerns and initiatives have
contributed to the growth of managed care. Managed care typically involves a
third party (frequently the payor) governing the provision of health care with
the objective of ensuring delivery in a high quality and cost effective manner.
One method for achieving this objective is the implementation of capitated
payment systems in which traditional fee for service methods of compensating
health care providers are replaced with systems that create incentives for the
provider to manage the health care needs of a defined population for a set fee.
Health care in the United States historically has been delivered by a
fragmented system of health care providers, including hospitals, individual
physicians and small groups of specialist and primary care physicians. The
focus on cost containment has placed many solo practices, small to mid-sized
physician groups and single specialty group practices at a significant
disadvantage because they typically have high operating costs relative to
revenue and little purchasing power with vendors of supplies. These physician
practices often lack the capital to purchase new clinical equipment and
technologies, such as information systems, necessary to enter into
sophisticated risk sharing contracts with payors. Additionally, these
physicians often do not have formal ties with other providers nor the ability
to offer
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coordinated care across a variety of specialties, thus reducing their
competitive position, particularly with managed care companies, relative to
larger provider organizations.
As a result of these changes in the market place, physicians are
increasingly abandoning traditional private practice in favor of affiliations
with larger organizations, such as the Company, that offer sophisticated
information systems, management expertise and capital resources. Many payors
and their intermediaries, including governmental entities and HMOs, are
increasingly looking to outside providers of physician management services to
develop and maintain quality outcome management programs and patient care data.
In addition, such payors and intermediaries look to share the risk of providing
health care services through capitation arrangements which provide for fixed
payments for patient care over a specified period of time.
Disease management is the comprehensive management of a patient's medical
care as it relates to the treatment of a specific chronic illness. The
provision of cancer care represents a significant and growing part of the
disease management market. Because more than 100 complex diseases compose what
is commonly termed cancer, its treatment often requires a multi-disciplinary
approach, involving numerous health care professionals with different
specializations and a variety of treatment settings, including physician
offices, hospitals, outpatient facilities and free-standing cancer treatment
centers. Cancer treatment centers may provide certain services, including
radiation therapy and infusion therapy, but they generally do not integrate
these services with physician practices. The Company believes that the current
fragmented system for treating cancer is inefficient, costly and inhibits
effective disease management.
The Company believes that the development of disease specialty networks
provides a substantial opportunity both to derive significant synergies and
operating efficiencies and to contract with managed care companies for a full
continuum of disease specific care. The Company expects the development of such
networks and systems not only to enhance productivity and improve the quality
of care, but also to meet the cost containment objectives of third party
payors. The Company believes that the evolution of disease specialty treatment
networks will play a major role in managed care contracting as payors recognize
that both cost savings and the quality of care are improved when reimbursement
and health care services target a specific illness or disease through
coordinated networks of health care providers.
Strategy
The Company's strategy is to develop, operate and manage integrated
disease specialty and primary care physician networks in specific geographic
locations by affiliating with physicians, medical networks and health care
businesses. The key elements of this strategy are to:
Increase Physician Affiliations. The Company affiliates with physicians by
acquiring their practices and entering into long-term management agreements
with the acquired practices, by managing IPAs through MSOs in which the Company
has ownership interests and by providing contract management services to
physicians in specialty care networks. By affiliating with leading physicians
and physician groups in a given community, the Company can secure a large
patient base, ensure appropriate, quality treatment and maintain patient
satisfaction. Additionally, as the Company affiliates with physicians in
certain markets, it makes available to these physicians medical support
services, including the Company's radiation therapy, diagnostic imaging,
lithotripsy, infusion, home health care services, and ambulatory surgery. By
integrating these acquired disease specialty and primary care medical practices
with related medical support services, the Company is able to develop a
continuum of care in its target markets. The Company believes that its
affiliations with additional physicians through IPAs will enable it to increase
its market share. IPAs and MSOs allow individual practitioners to access
patients in their respective areas through contracts with HMOs without having
to join a group practice.
Develop Practice Networks. In conjunction with its acquisition strategy,
the Company seeks to build integrated LPNs of disease specialty and primary
care physicians in targeted markets. The Company typically acquires a core
physician practice or affiliates with an IPA. The Company then seeks to acquire
or affiliate with additional physician practices and medical support services.
Through the implementation of this strategy, the Company seeks to provide a
comprehensive range of health care services within a given region, thereby
enhancing its ability to enter into contractual arrangements with managed care
organizations.
Facilitate Acquisitions and Integration Through Development. As a part of
its strategy to affiliate with physicians and acquire physician practices and
medical support service companies, the Company provides medical
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facility development services to related and unrelated third parties for the
establishment of health parks, medical malls and medical office buildings. The
Company believes that the relationships that it fosters with physicians and
medical support service companies (which may be tenants and/or owners of the
medical facilities developed by the Company), enhances the Company's
affiliation and acquisition prospects and aids in the integration of its
affiliated physicians and medical support service companies.
Contract with Managed Care Companies. The Company actively pursues
contractual arrangements with managed care organizations. Within its LPNs, the
Company seeks to provide an appropriate balance of physician and medical
services to attract managed care payors. Depending upon the particular market,
the Company may develop disease specialty networks which can be used to procure
managed care contracts pursuant to which the Company's affiliated physicians
are responsible for providing all or a portion of disease specific health care
services to a particular patient population, or the Company may develop a
broader array of services designed to enhance its ability to attract
comprehensive managed care contracts. In addition, the Company manages the
contracts of specialty care physicians with managed care companies in order to
facilitate the delivery of services in specialty health care networks.
Implement Integrated Information Systems. The Company intends to continue
to develop its integrated information management systems so as to improve
patient care by improving physician access to patient information. The Company
believes that its data processing capabilities further enhances its ability to
service managed care contracts by providing access to the clinical and
financial data necessary to perform outcome studies, cost analyses, utilization
reviews and other analyses which can provide the information necessary for the
managed care community to evaluate and contract with the Company and its health
care providers.
Achieve Operating Efficiencies. The Company seeks to achieve operating
efficiencies through the consolidation of physician practices. By consolidating
overhead, including billing, collections, accounting and payroll, the Company
believes that it can realize operating efficiencies. In addition, by rendering
support and management functions, the Company enables its affiliated physicians
to spend a higher proportion of their time with patients, thereby improving
patient care and enhancing revenue.
Physician Affiliations Through Management Agreements and Employment Agreements
As of August 31, 1997, the Company has affiliated through management
and/or employment agreements with 360 physicians in the following locations:
<TABLE>
<CAPTION>
No. of
Physicians
Under
LPN Contract Specialties
- --- ---------- -----------
<S> <C> <C>
Florida ........................ 141 Primary Care, Oncology, Cardiology,
Gastroenterology, Podiatry, Rheumatology,
Obstetrics-Gynecology, General and Vascular
Surgery, Dermatology, Pulmonary, Orthopedic,
Neurology, Pediatrics, Geriatrics, Urology and
Radiology
Atlanta ........................ 52 Oncology, Gastroenterology, Urology,
Obstetrics-Gynecology and Surgery
Washington, D.C./Baltimore ...... 11 Oncology, and Infectious Diseases
Connecticut/New York/New Jersey 125 Primary Care, Radiology, Immunology, Cardiology,
Dermatology, Gastroenterology, General Surgery,
Infectious Diseases, Internal Medicine, Neurology,
Obstetrics-Gynecology, Oncology, Opthamology,
Orthopedics, Pediatrics, Podiatry, Psychiatrics and
Urology
Other Markets .................. 31 Primary Care, Oncology, Obstetrics-Gynecology,
---- Surgery and Pediatrics
Total Physicians ............... 360
</TABLE>
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The Company affiliates with physicians through management agreements with
physician practices or employment agreements with individual physicians. When
affiliating in this manner, the Company generally acquires the assets of the
physician practice, including its equipment, furniture, fixtures and supplies
and, in some cases, service contracts and goodwill. Currently, the Company
manages the practices of 321 physicians and employs another 39 physicians.
The Company's relationships with its affiliated physicians are set forth
in various asset purchase, management services, employment and consulting
agreements. Through the asset purchase agreement, the Company acquires at fair
market value the assets of a physician practice. Accounts receivable are
typically purchased at the net realizable value. The purchase price of the
assets of a physician practice generally consists of cash and/or stock and the
assumption of certain debt, leases and other contracts necessary for the
operation of the practice.
The Company and its affiliated physicians enter into management services
or employment agreements which delineate the responsibilities and obligations
of each party. The management services agreements generally have a 10 to
40-year term. The employment agreements generally have a seven to 10-year term,
and in most instances, the contracting physicians can extend the terms of their
employment agreements in five-year increments for an unlimited duration until
they reach a specified age. The management services agreements provide that the
physicians are responsible for the provision of all medical services and the
Company is responsible solely for the management and operation of all other
aspects of the affiliated practice. The Company provides the equipment,
facilities and supplies necessary to operate the medical practice and employs
substantially all of a practice's non-physician personnel, except those whose
services are directly related to the provision of medical care. The management
and administration of the practice, including managed care contracting, rests
with the Company. Generally, a management services agreement with a physician
practice group cannot be terminated by either the Company or the practice group
prior to its stated expiration date without cause. The Company's employment
agreements generally are terminable by the physicians upon 90 to 180-days
notice. Ordinarily, the Company reserves the right to renegotiate terms of the
management services agreement if there are significant changes in reimbursement
levels. Upon termination for cause or at the expiration of a physician's
relationship with the Company, the Company has the right to require the
affiliated physicians to repurchase certain assets originally purchased by the
Company and assets acquired during the term of the relationship.
For providing services under management services agreements entered into
prior to April 30, 1996, physicians generally receive a fixed percentage of net
revenue of the practice. "Net revenue" is defined as all revenue computed on an
accrual basis generated by or on behalf of the practice after taking into
account certain contractual adjustments or allowances. The revenue is generated
from professional medical services furnished to patients by physicians or other
clinicians under physician supervision. In several of the practices, the
Company has guaranteed that the net revenues of the practice will not decrease
below the net revenues that existed immediately prior to the agreement with the
Company. Under management services agreements entered into after April 30,
1996, the physicians receive a portion of the operating income of the practice
which amounts vary depending on the profitability of the practice. Net revenues
under management services agreements for the six months ended July 31, 1997
were $75.7 million.
The Company believes a shared governance approach is critical to the
long-term success of a physician practice management company. In this regard,
the Company's agreements provide for physician concurrence on critical
strategic issues such as annual operating and capital budgets, fee structures
and schedules and the practice's strategic plan. The strategic plan developed
for the affiliated physician practices addresses both the future addition of
practitioners and the expansion of locations and services. The Company works
closely with its affiliated physicians to target and recruit new physicians and
merge with or integrate other groups and specialties.
Physician Affiliations Through IPAs and Contract Management
The Company owns an MSO that provides management services to an IPA
composed of over 400 physicians based in Connecticut, a 50% interest in an MSO
that provides management services to an IPA composed of 60 primary care
physicians in Georgia, an 80% interest in an MSO that provides management
services to an IPA composed of over 650 physicians in New Jersey, a 51%
interest in an MSO that provides management services to an IPA composed of over
1,000 physicians in New York and 50% interests in two IPAs in Florida composed
of approximately 1,500 physicians. An IPA is generally composed of a group of
geographically diverse independent physicians who form an association for the
purpose of contracting as a single entity. The IPA structure not only
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<PAGE>
increases the purchasing power of the constituent practices, but also provides
a foundation for the development of an integrated physician network. The
Company believes that many IPAs will merge with other practice groups to
develop larger integrated medical groups, thereby becoming increasingly
attractive to managed care companies. The Company intends to capitalize on its
affiliations with IPAs to establish additional LPNs.
The Company recently expanded its managed care contracting capabilities
through the purchase of Physicians Consultant & Management Corporation
("PCMC"), which provides management services to national and local physician
specialty care networks containing approximately 2,500 physician members.
Through its specialty care networks, PCMC facilitates the delivery of health
care services to approximately 7,300,000 member patients. The Company plans to
continue to increase its managed care capabilities into additional specialty
care physician networks to expand existing relationships with established
managed care organizations.
The Company also seeks to enter into agreements to manage capitated
provider networks. The Company expects that under these agreements, it would
receive a fixed management fee based upon contract revenues as well as a
certain percentage of risk pools.
Medical Support Services
As part of its strategy to provide a comprehensive range of health care
services in its markets, the Company provides certain medical support services
related to the management of disease and episodic care, including radiation
therapy, diagnostic imaging, infusion therapy, home health care, lithotripsy
services and ambulatory surgery. These services are provided both as part of
the Company's LPN structure and separately in certain markets in which there is
a competitive advantage to do so.
Within the scope of its disease specialty networks, the Company delivers a
broad array of medical support services. The Company supports its cancer
networks with radiation therapy (the Company has 10 radiation therapy centers
in six states), infusion therapy (the Company provides infusion therapy in
several states which are managed from three regional offices), diagnostic
imaging (the Company has ten centers in five states, which includes the five
centers which were acquired during August 1997), home health care services (the
Company provides home health care services in six South Florida counties which
are managed from five local offices) and ambulatory surgery (the Company
manages one ambulatory surgery center).
The Company also provides lithotripsy services and currently operates one
fixed site and seven mobile lithotripters which provide lithotripsy services in
Arkansas, Florida, Indiana, Kansas, Kentucky, Missouri, Oklahoma, Tennessee and
Texas. These services are managed from three regional offices. Lithotripsy is a
non-invasive procedure that utilizes shock waves to fragment kidney stones, and
is the preferred alternative to surgery for kidney stones, suitable for the
treatment of over 90% of the applicable patients. The Company provides its
mobile lithotripsy services under contracts with approximately 70 hospitals and
other health care facilities. The hospital or health care facility normally
pays the Company on a per procedure basis. The Company's contracts with such
hospitals and facilities generally have terms of one to three years.
LPNs
The Company has established and is developing LPNs in the Florida,
Atlanta, Connecticut/New York/New Jersey and Baltimore/Washington, D.C. areas
as its initial target LPN markets. To further develop its LPNs, the Company
intends to affiliate with additional physician group practices and acquire,
develop or affiliate with related medical support services. When entering new
target markets, the Company will either seek to acquire a core practice group
or manage an IPA. The Company undertakes market analyses and demographic
studies to evaluate the business opportunities in a particular geographic area
and seeks to capitalize on these opportunities by developing relationships with
appropriate physicians and other health care providers. Within each LPN, the
Company seeks a balance between primary care and specialty physicians and to
integrate certain related medical support services for the ultimate purpose of
providing a strategic network of comprehensive medical services attractive to
managed care and risk-based third party contractors. In certain markets, the
Company establishes relationships with unaffiliated entities for the purpose of
contracting with managed care companies.
In keeping with its major strategy of expanding its Northeast presence in
New York, New Jersey and Connecticut, the Company has affiliated with over
2,100 physicians through IPAs, with more than 1,000 in New York's five
boroughs, 400 in Connecticut and 650 in New Jersey. During July 1997, the
Company entered into a
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<PAGE>
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 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. During August 1997, the Company entered into a 20-year administrative
services agreement with BAB Nuclear Radiology, P.C. BAB is a physician
corporation with revenues in excess of $12 million that operates five
diagnostic imaging centers in Suffolk County on Long Island, New York. During
June, 1997, the Company also entered into a management agreement for a
radiation therapy center in Westchester, New York. In October 1996, the Company
agreed to an exclusive arrangement with North Shore Health System of Manhasset,
New York, to jointly develop, own and operate medical facilities in five
metropolitan New York counties.
The development of the Company's Atlanta LPN provides an example of the
implementation of the Company's development strategy. In Atlanta, the Company
acquired three radiation centers in March 1995 and has since created a
comprehensive cancer disease management network of 24 oncologists in 17 sites.
The Company's Atlanta LPN continues to develop by affiliating with primary care
and multi-specialty groups to create a comprehensive, fully-integrated regional
network. This network currently includes affiliations through management and/or
employment agreements with 52 physicians and through an IPA with 60 physicians.
The Company is presently negotiating with additional physician providers and is
assessing the opportunity to create a comprehensive health park in the Atlanta
area.
In the Florida market, the Company initially developed affiliate
relationships with six primary care physicians. The Company has currently
affiliated through management and/or employment agreements with 141 physicians
which includes 20 oncologists and the Company operates a cancer care network
which through capiated managed care contracts provides services to
approximately 151,000 covered lives. The Company also has affiliated through
IPAs with approximately 1,500 physicians. In addition, the Company provides
infusion therapy, home health, diagnostic imaging, rehabilitation services and
ambulatory surgery in its Florida LPN.
In the Washington, D.C./Baltimore area, the Company operates three
radiation centers and provides infusion therapy services through its managed
care contracts and physician affiliations. The Company has affiliated with 11
physicians including 8 medical and radiation oncologists. In addition, the
Company has entered into an agreement with the Medlantic Healthcare Group in
Washington, D.C. (and its Washington Hospital Center and Washington Cancer
Institute) for the formation and operation of the Washington Regional Oncology
Network. This network will be dedicated to obtaining contracts for cancer care
in the Washington region and also includes the formation of a joint venture for
the management of the Washington Ambulatory Infusion Center.
The Company has entered into management and employment agreements with 70
oncologists. Net revenues for cancer related services for the six months ended
July 31, 1997 were $52.2 million. In its Florida, Atlanta and Washington,
D.C./Baltimore LPNs, the Company has assembled three discrete networks of
cancer physicians and related cancer care services, and as a result, the
Company provides services pursuant to managed care contracts to over 151,000
covered lives. Under these contracts, the Company and its affiliate physicians
provide some or all of the following services: medical and radiation oncology
services, bone marrow transplants, infusion therapy, diagnostic services and
home care. The Company has also developed cancer care networks with
unaffiliated entities for contracting purposes in certain markets.
Medical Facility Development
The Company provides medical facility development services to related and
unrelated third parties for the establishment of health parks, medical malls
and medical office buildings. A "health park" is an integrated health care
environment composed of several buildings which links physician practices,
medical support services and subacute care facilities on a single campus. A
"medical mall," often found in a health park, combines physician offices with
related medical support services such as diagnostic imaging, physical
rehabilitation, laboratory services and wellness programs in one facility. The
Company also develops office buildings which serve physicians and providers of
ancillary medical services.
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<PAGE>
The Company believes that the convenience of "one-stop" scheduling and
medical related services together with on-site treatment provided at the
Company's developed medical facilities will increase patient satisfaction and
cost-efficiency. By providing a centralized delivery site for state-of-the-art
technology, information systems and patient care models, a full continuum of
care can be provided by a wide range of physician specialties and medical
support services at one location. The Company believes that physicians will
find affiliation with such facilities attractive and that third party payors
will seek to contract with physician practices and related medical support
service companies operating in such facilities.
The Company's medical facility development services include project
finance assistance, project management, construction management, construction
design engineering, consulting, physician recruitment, leasing and marketing.
The Company currently has 19 projects under development and has facilities
under construction in Florida, Texas, California, New Jersey, Nevada and
Arizona. The Company also has five projects under contract and anticipates that
construction of such facilities will begin during the next six months.
Under its development agreements, the Company is generally obligated to
secure funding for and guaranty the maximum cost of a project. In order to
minimize the risks from these obligations, the Company enters into construction
agreements with general contractors to construct the project for a "guaranteed
maximum cost." Furthermore, each construction agreement provides for
indemnification of the Company by the general contractor for certain losses and
damages. Each construction agreement also requires the contractor to obtain and
maintain a performance bond and a labor and material payment bond, written by a
surety company with a Best's Key Guide Rating of not less than A+12 and
satisfactory to the owner of the land on which a project is developed and the
construction lender.
Among the Company's development clients are some of the largest for-profit
public hospital companies in the United States. To date, the Company's clients
and primary negotiators of the Company's fees generally have been the land
owners or land lessors of the developed sites. Negotiations generally include
the Company, the entities which own the developed projects, the land lessor (if
applicable) and, in many cases, the prospective tenants of the office space.
The Company offers its physician-tenants an opportunity to become equity
investors in the facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Medical Facility Development."
The compensation received by the Company is based upon negotiated amounts for
each service provided. Although the Company does not maintain an ownership
interest in the facilities it develops, certain of the Company's officers and
directors have an interest in such facilities. In each transaction between the
Company and a facility in which certain of its officers and directors have an
interest, third parties, including the land owners and land lessors of the
sites and the unaffiliated investors in the facility, participate in
establishment of fees to the Company. All transactions between the Company and
affiliated owners and physicians are and will continue to be based upon
competitive bargaining and are and will be on terms no less favorable to the
Company than those provided to unaffiliated parties. In addition, the Company
monitors development fees in the industry to ensure that its fees in such
transactions meet this standard.
The Company believes that its medical facility development services and
project finance strategy are a significant component of the Company's overall
business strategy. The Company's project finance strategy focuses upon the
involvement of its future tenants as significant investors in and owners of the
medical facilities developed by the Company. Because its tenants are physicians
and medical support service companies, the Company believes that the
relationships that it develops through its medical facility development efforts
also enhances the Company's ability to affiliate with physicians and acquire
physician practices and medical support service companies. The development of
medical facilities by the Company is intended to enhance the creation of the
new group practices, increase the number of integrated medical service delivery
sites and promote alternative delivery models for third party payors in its
developed sites. The Company believes that such activity, in turn, will aid in
the integration of its affiliated physicians and medical support service
companies.
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Information Systems
The Company believes that effective and efficient integration of clinical
and financial data provides a competitive advantage in bidding for managed care
contracts and contributes to a company's success in the complex reimbursement
environment of the health care industry. The Company also believes that the use
of technology can improve patient care by improving physician access to patient
information. Therefore, the Company is in the process of selecting and
implementing management information systems designed to facilitate the
transmittal and coordination of important patient and operational data. The
Company's objective is to implement a system which consists of three specific
areas: practice management, electronic clinical records and comprehensive care
and management reporting. The implementation of the systems selected will occur
in stages, as the Company continues to analyze and support the systems in place
in its existing and acquired physician practices and medical support service
companies.
Competition
The physician practice management industry is highly competitive. The
Company competes with local and national providers of physician management and
certain other medical services and for the recruitment of physicians. Certain
of the Company's competitors have access to substantially greater financial,
management and other resources than the Company. The majority of the
competition faced by the Company is based primarily on cost and quality. Each
of the affiliated physicians has entered into an agreement not to compete with
the operations of the Company both during the term of the applicable agreement
and for a period of one year or greater thereafter.
Government Regulation
Various state and federal laws regulate the relationship between providers
of health care services, physicians and other clinical services. As a business
in the health care industry, the Company is subject to these laws and
regulations. The Company's medical support services, for example, are subject
to various licensing and certification requirements including Certificate of
Need regulations. The Company is also subject to laws and regulations relating
to business corporations in general. The Company believes its operations are in
material compliance with applicable laws; however, the Company has not received
a legal opinion from counsel that its operations are in material compliance
with applicable laws and many aspects of the Company's business operations have
not been the subject of state or federal regulatory interpretation. Moreover,
as a result of the Company providing both physician practice management
services and medical support services, the Company may be the subject of more
stringent review by regulatory authorities, and there can be no assurance that
a review of the Company's or the affiliated physicians' businesses by courts or
regulatory authorities will not result in a determination that could adversely
affect the operations of the Company or the affiliated physicians or that the
health care regulatory environment will not change so as to restrict the
Company's or the affiliated physicians' existing operations or their expansion.
The laws of many states prohibit business corporations such as the Company
from practicing medicine and employing physicians to practice medicine. In
those states where the Company employs physicians, it believes its operations
are in material compliance with applicable laws. The Company does not exercise
influence or control over the practice of medicine by the physicians with whom
it contracts. Accordingly, the Company believes that it is not in violation of
applicable state laws relating to the practice of medicine. The laws in most
states regarding the corporate practice of medicine have been subjected to
limited judicial and regulatory interpretation and, therefore, no assurances
can be given that the Company's activities will be found to be in compliance,
if challenged. In addition to prohibiting the practice of medicine, numerous
states prohibit entities like the Company from engaging in certain transactions
such as fee-splitting, with physicians.
State and federal statutes impose substantial penalties, including civil
and criminal fines and imprisonment, on health care providers that fraudulently
or wrongfully bill governmental or other third party payors for health care
services. The federal law prohibiting false billings allows a private person to
bring a civil action in the name of the United States government for violations
of its provisions. The Company believes it is in material compliance with such
laws, but there can be no assurances that the Company's activities will not be
challenged or scrutinized by governmental authorities. Moreover, technical
Medicare and other reimbursement rules affect the structure of physician
billing arrangements. The Company believes it is in material compliance with
such regulations, but upon review, regulatory authorities could conclude
otherwise, and in such event, the Company may have to modify its
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relationship with its affiliated physician groups. Noncompliance with such
regulations may adversely affect the operation of the Company and subject it
and such physician groups to penalties and additional costs.
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-kickback Amendments," prohibit the offer, payment, solicitation or
receipt of any form of remuneration either in return for the referral of
Medicare or state health program patients or patient care opportunities, or in
return for the recommendation, arrangement, purchase, lease or order of items
or services that are covered by Medicare or state health programs. The
Anti-kickback Amendments are broad in scope and have been broadly interpreted
by courts in many jurisdictions. Read literally, the statute places at risk
many otherwise legitimate business arrangements, potentially subjecting such
arrangements to lengthy, expensive investigations and prosecutions initiated by
federal and state governmental officials. In particular, the Office of the
Inspector General of the U.S. Department of Health and Human Services has
expressed concern that the acquisition of physician practices by entities in a
position to receive referrals from such physicians in conjunction with the
physicians' continued practice in affiliation with the purchaser could violate
the Anti-kickback Amendments.
In July 1991, in part to address concerns regarding the Anti-kickback
Amendments, the federal government published regulations that provide
exceptions, or "safe harbors," for certain transactions that will be deemed not
to violate the Anti-kickback Amendments. Among the safe harbors included in the
regulations were provisions relating to the sale of physician practices,
management and personal services agreements, and employee relationships.
Additional safe harbors were published in September 1993 offering protections
under the Anti-kickback Amendments to eight new activities, including referrals
within group practices consisting of active investors. Proposed amendments to
clarify these safe harbors were published in July 1994 which, if adopted, would
cause substantive retroactive changes to the 1991 regulations. Although the
Company believes that it is not in violation of the Anti-kickback Amendments,
some of its operations do not fit within any of the existing or proposed safe
harbors.
The Company believes that, although it is receiving remuneration under
management services agreements, it is not in a position to make or influence
the referral of patients or services reimbursed under government programs to
the physician groups, and therefore, believes it has not violated the
Anti-kickback Amendments. In certain states, the Company is a separate provider
of Medicare or state health program reimbursed services. To the extent the
Company is deemed by state or federal authorities to be either a referral
source or a separate provider under its management services agreements and to
receive referrals from physicians, the financial arrangement under these
agreements could be subject to scrutiny under the Anti-kickback Amendments.
Violation of the Anti-kickback Amendments is a felony, punishable by fines up
to $25,000 per violation and imprisonment for up to five years. In addition,
the Department of Health and Human Services may impose civil penalties
excluding violators from participation in Medicare or state health programs.
Significant limitations on physician referrals were enacted, subject to
certain exemptions, by Congress in the Omnibus Budget Reconciliation Act of
1993. These prohibitions, commonly known as "Stark II," amended prior physician
self-referral legislation known as "Stark I" by dramatically enlarging the
field of physician-owned or physician-interested entities to which the referral
prohibitions apply. Effective January 1, 1995 and subject to certain
exemptions, Stark II prohibits a physician or a member of his immediate family
from referring Medicare or Medicaid patients to an entity providing "designated
health services" in which the physician has an ownership or investment
interest, or with which the physician has entered into a compensation
arrangement including the physician's own group practice. The designated health
services include the provision of radiology and other diagnostic services,
radiation therapy services, physical and occupational therapy services, durable
medical equipment, parenteral and enteral nutrients, certain equipment and
supplies, prosthetics, orthotics, outpatient prescription drugs, home health
services and inpatient and outpatient hospital services. The penalties for
violating Stark II include a prohibition on Medicaid and Medicare reimbursement
and civil penalties of as much as $15,000 for each violative referral and
$100,000 for participation in a "circumvention scheme." A physician's ownership
of publicly traded securities of a corporation with equity exceeding $75
million as of the end of its most recent fiscal year is not deemed to
constitute an ownership or investment interest in that corporation under Stark
II. The Company was not eligible for this exemption as of its fiscal year
ending December 31, 1995. In 1996, after completion of the initial public
offering, the Company changed its fiscal year end to January 31. The Company
believes that it presently satisfies the Stark II stockholders' equity
exception and that its compensation arrangements satisfy other applicable
exceptions in Stark II.
41
<PAGE>
The Company believes that its activities are not in violation of Stark I
or Stark II; however, the Stark legislation is broad and ambiguous.
Interpretative regulations clarifying the provisions of Stark I were issued on
August 14, 1995 and Stark II regulations have yet to be proposed. While the
Company believes it is in compliance with the Stark legislation, future
regulations could require the Company to modify the form of its relationships
with the affiliated physician groups. Moreover, the violation of Stark I or II
by the Company's affiliated physician groups could result in significant fines
and loss of reimbursement which would adversely affect the Company. The Anti-
kickback and Stark laws prevent the Company from requiring referrals from
affiliated physician groups.
Many states have adopted similar prohibitions against payment intended to
induce referrals of Medicaid and other third party payor patients. The State of
Florida, for instance, enacted a Patient Self-Referral Act in April 1992 that
severely restricts patient referrals for certain services, prohibits mark-ups
of certain procedures, requires disclosure of ownership in a business to which
patients are referred and places other regulations on health care providers.
The Company believes it is likely that other states will adopt similar
legislation. Accordingly, expansion of the operations of the Company to certain
jurisdictions may require it to comply with such jurisdictions' regulations
which could lead to structural and organizational modifications of the
Company's form of relationships with physician groups. Such changes, if any,
could have an adverse effect on the Company.
The Company has adopted a formal compliance program designed to prevent
violations of Stark II and the Anti-kickback Amendments in both its
acquisitions and day to day operations. The Company has hired a full-time
compliance officer to implement and monitor the compliance program.
Laws in all states regulate the business of insurance and the operation of
HMOs. Many states also regulate the establishment and operation of networks of
health care providers. While these laws do not generally apply to the hiring
and contracting of physicians by other health care providers, there can be no
assurance that regulatory authorities of the states in which the Company
operates would not apply these laws to require licensure of the Company's
operations as an insurer, as an HMO or as a provider network. The Company
believes that it is in compliance with these laws in the states in which it
does business, but there can be no assurance that future interpretations of
insurance and health care network laws by regulatory authorities in these
states or in the states into which the Company may expand will not require
licensure or a restructuring of some or all of the Company's operations.
Reimbursement and Cost Containment
Approximately 34% of the revenue of the Company is derived from payments
made by government sponsored health care programs (principally, Medicare and
Medicaid). As a result, any change in reimbursement regulations, policies,
practices, interpretations or statutes could adversely affect the operations of
the Company. The U.S. Congress passed a fiscal year 1996 budget resolution that
calls for reductions in the rate of spending increases over the next seven
years of $270 billion in the Medicare program and $182 billion in the Medicaid
program. Through the Medicare program, the federal government has implemented a
resource-based relative value scale ("RBRVS") payment methodology for physician
services. RBRVS is a fee schedule that, except for certain geographical and
other adjustments, pays similarly situated physicians the same amount for the
same services. The RBRVS is adjusted each year and is subject to increases or
decreases at the discretion of Congress. The implementation of RBRVS may result
in reductions in payment rates for procedures provided by physicians under
current contract with the Company. RBRVS-type payment systems have also been
adopted by certain private third party payors and may become a predominant
payment methodology. A broader implementation of such programs would reduce
payments by private third party payors and could indirectly reduce the
Company's operating margins to the extent that the cost of providing management
services related to such procedures could not be proportionately reduced. To
the extent the Company's costs increase, the Company may not be able to recover
such cost increases from government reimbursement programs. In addition,
because of cost containment measures and market changes in nongovernmental
insurance plans, the Company may not be able to shift cost increases to
nongovernmental payors. The Company expects a reduction from historical levels
in per patient Medicare revenue received by certain of the physician groups
with which the Company contracts; however, the Company does not believe such
reductions would, if implemented, result in a material adverse effect on the
Company.
In addition to current governmental regulation, the Clinton Administration
and several members of Congress have proposed legislation for comprehensive
reforms affecting the payment for and availability of health care services.
Aspects of certain of such health care proposals, such as reductions in
Medicare and Medicaid payments,
42
<PAGE>
if adopted, could adversely affect the Company. Other aspects of such
proposals, such as universal health insurance coverage and coverage of certain
previously uncovered services, could have a positive impact on the Company's
business. It is not possible at this time to predict what, if any, reforms will
be adopted by Congress or state legislatures, or when such reforms would be
adopted and implemented. As health care reform progresses and the regulatory
environment accommodates reform, it is likely that changes in state and federal
regulations will necessitate modifications to the Company's agreements and
operations. While the Company believes it will be able to restructure in
accordance with applicable laws and regulations, the Company cannot assure that
such restructuring in all cases will be possible or profitable.
Insurance
Health care companies, such as the Company, are subject to medical
malpractice, personal injury and other liability claims which are customary
risks inherent in the operation of health care facilities and provision of
health care services. The Company maintains property insurance equal to the
amount management deems necessary to replace the property, and liability and
professional malpractice insurance policies in the amount of $20,000,000
(annual aggregate) and with such coverages and deductibles which are deemed
appropriate by management, based upon historical claims, industry standards and
the nature and risks of its business. The Company provides medical malpractice
insurance for its employee physicians in the amount of $1,000,000 per claim and
$3,000,000 annual aggregate and also requires that non-employee physicians
practicing at its facilities carry medical malpractice insurance to cover their
respective individual professional liabilities. There can be no assurance that
a future claim will not exceed available insurance coverages or that such
coverages will continue to be available for the same scope of coverages at
reasonable premium rates. Any substantial increase in the cost of such
insurance or the unavailability of any such coverages could have a material
adverse effect on the Company's business.
Employees
As of July 31, 1997, the Company employed approximately 1,240 persons,
approximately 1,183 of whom were full-time employees. The Company believes that
its labor relations are good.
Legal Proceedings
The Company is subject to legal proceedings in the ordinary course of its
business. The Company does not believe that any such legal proceedings will
have a material adverse effect on the Company, although there can be no
assurance to this effect.
A subsidiary of the Company, Oncology Therapies, Inc. ("OTI") (formerly
Radiation Care, Inc., "RCI") is subject to the litigation described below which
relates to events prior to the Company's operation of RCI, and the Company has
agreed to indemnify and defend certain defendants in the litigation who were
former directors and officers of RCI, subject to certain conditions.
In December 1994, prior to its merger with the Company in March 1995, RCI
entered into a settlement agreement with the federal government arising out of
claims under the fraud-and-abuse provisions of the Medicare law. Under the
settlement agreement, RCI, without admitting that it violated the law,
consented to a civil judgment providing for its payment of $2 million to the
federal government and the entry of an injunction against violations of such
provisions.
On February 16, 1995, six former stockholders of RCI filed a consolidated
amended Class Action Complaint in Delaware Chancery Court (In re Radiation
Care, Inc. Shareholders Litigation, Consolidated C.A. No. 13805) against RCI,
Thomas Haire, Gerald King, Charles McKay, Abraham Gosman, Oncology Therapies of
America, Inc. ("OTA") and A.M.A. Financial Corporation, ("AMA") alleging that
the RCI stockholders should have received greater consideration for their RCI
stock when RCI was merged with the Company. Plaintiffs allege breaches of
fiduciary duty by the former RCI directors, as well as aiding and abetting of
such fiduciary duty breaches by Mr. Gosman, OTA and AMA. Plaintiffs seek
compensatory or rescissionary damages of an undisclosed amount on behalf of all
RCI stockholders, together with an award of the costs and attorneys' fees
associated with the action. No class has been certified in this litigation. On
May 17, 1996, the Company filed an Answer denying any liability of any
defendant in connection with this litigation. All discovery in the Delaware
action, except for expert and class certification related discovery, is now
complete. On January 10, 1997, the Company filed a Motion for Summary
43
<PAGE>
Judgment seeking dismissal of all plaintiffs' claims. An agreement in principal
was reached in May to settle the case, subject to court and class approval, and
definitive settlement documents are being prepared.
On August 4, 1995, 26 former stockholders of RCI filed a Complaint for
Money Damages against Richard D'Amico, Ted Crowley, Thomas Haire, Gerald King,
Charles McKay and Randy Walker (all former RCI officers and/or directors) in
the Superior Court of Fulton County, in the State of Georgia (Southeastern
Capital Resources, L.L.C. et al. v. Richard D'Amico et al., Civil Action No.
E41225). Early on in the litigation two of the plaintiffs withdrew from the
litigation, and during the deposition phase of the case, two more plaintiffs
dropped out. However, plaintiffs added four additional plaintiffs with the
filing of an Amended Complaint on November 27, 1995. Plaintiffs allege a breach
of fiduciary duty by the former RCI directors Haire, King and McKay, a
conspiracy by the RCI officer defendants D'Amico, Crowley and Walker, and
negligence by all defendants. Plaintiffs seek additional consideration for
their shares of RCI common stock in the form of compensatory and monetary
damages in the amount of $5.7 million, plus punitive damages, interest, costs
and attorneys fees. On September 22, 1995, the defendants filed an Answer
denying any liability in connection with this litigation. On October 23, 1995,
the defendants filed a motion to stay the action pending resolution of the
Delaware class action which was heard by the Court on January 29, 1996. The
Court denied the Motion on April 16, 1996. All discovery in the case was
completed as of September 13, 1996. The Defendants moved for summary judgment
on September 20, 1996. The plaintiffs filed an opposition on November 18, 1996.
Defendants filed a Reply brief on February 27, 1997. The Company is not a party
to this litigation and its exposure is limited to its obligation under its
by-laws to indemnify the former officers and directors of RCI to the fullest
extent permitted by Delware law. In May, an agreement in principal was reached
to settle the case subject to a number of conditions not yet satisfied.
Definitive settlement documents are now being prepared.
44
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information as of July 31, 1997
concerning the directors and executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Abraham D. Gosman ............... 68 Chairman of the Board of Directors and Chief
Executive Officer
Frederick R. Leathers ......... 39 Chief Financial Officer and Treasurer
Francis S. Tidikis ............ 50 Chief Operating Officer
Edward E. Goldman, M.D. ......... 52 Executive Vice President of Physician Development
and Chief Medical Officer
Gregory Gardner ............... 41 Executive Vice President Finance
Alberto M. Hernandez ............ 36 General Counsel
Robert A. Miller ............... 42 Director and President
Eric Moskow ..................... 39 Director and Executive Vice President Strategic
Planning
Bruce A. Rendina ............... 43 Vice Chairman of the Board of Directors
Hugh L. Carey .................. 78 Director
Joseph N. Cassese ............... 67 Director
John T. Chay .................. 38 Director
David M. Livingston, M.D. ...... 56 Director
Stephen E. Ronai ............... 60 Director
</TABLE>
The following is a biographical summary of the experience of the executive
officers and directors of the Company:
Abraham D. Gosman has served since June 1994 as an executive officer of
the Company and is presently the Chairman of the Board of Directors and Chief
Executive Officer of the Company. Previously, he founded and was the principal
owner of The Mediplex Group, Inc. ("Mediplex"), a diversified health care
company, and its predecessor companies for more than 15 years, with the
exception of the period from April 1986 to August 1990 when Mediplex was owned
by Avon Products, Inc. ("Avon"). He was the Chief Executive Officer of Mediplex
from its inception to September 1988 and assumed that position again after
Mediplex was purchased from Avon in August 1990. In addition, Mr. Gosman has
served as Chairman of the Board of Trustees and Chief Executive Officer of
Meditrust, the nation's largest health care real estate investment trust, since
its inception in 1985. In October 1996, Mr. Gosman became Chairman of the Board
of CareMatrix Corporation, an assisted living development and management
company.
Frederick R. Leathers has served since June 1994 as the Chief Financial
Officer and Treasurer of the Company. Previously, he served as Treasurer, Chief
Financial Officer and Principal Accounting Officer of Mediplex from October
1991 to June 1994, Corporate Controller from May 1991 to October 1991 and held
the position of Assistant Controller from May 1986 to May 1987. He was
Treasurer of A.M.A. Advisory Corp. (the advisor to Meditrust) and Controller of
Meditrust from July 1988 to January 1991. Mr. Leathers was associated with
State Street Bank and Trust Company, Inc. in the mutual funds division from May
1987 to July 1988.
Francis S. Tidikis has served as the Company's Chief Operating Officer
since November 1996. He also served from January 1996 to March 1996 as the
Company's Executive Vice President of Marketing and from March 1996 to October
1996 as its Executive Vice President of Operations. Previously, Mr. Tidikis was
Senior Vice President of Physician Management Services for Tenet Healthcare
Corporation from March 1995 to January 1996. Mr. Tidikis had been with Tenet
Healthcare Corporation and its predecessor, National Medical Enterprises, since
April 1981, serving as Executive Vice President of the Eastern District from
June 1991 to February 1995 and as Vice President of Operations for the Eastern
Region Hospital Group from February 1984 to September 1990. Mr. Tidikis
currently serves as a director of Professional Liability Insurance Company.
Edward E. Goldman, M.D. has served since October 1994 as President of a
subsidiary of the Company, since October 1995 as an executive officer of the
Company and is presently Executive Vice President of Physician Development and
the Company's Chief Medical Officer. Dr. Goldman is a board certified family
practice physician
45
<PAGE>
and previously served as Chairman of PAL-MED Health Services from February 1983
to September 1994, a multi-specialty IPA which provides physicians services and
manages health care related services.
Gregory Gardner has served since November 1996 as Executive Vice President
of Finance of the Company. Previously, he served as Senior Vice President,
Financial Operations of Good Samaritan & St. Mary's Medical Centers from August
1995 to November 1996. From November 1990 to December 1993 Mr. Gardner served
as American Medical International, Inc.'s Corporate Director of Finance and
from January 1994 to July 1995 as its Corporate Director of Development.
Alberto M. Hernandez has served as general counsel since July 1996 and as
Secretary of the Company since March 1997. Mr. Hernandez was associated with
the Miami, Florida law firm of Greenberg, Traurig, Hoffman, Lipoff, Rosen &
Quentel, P.A. from March 1991 through June 1996.
Robert A. Miller has served as the Company's President and a director of
the Company since March 1997. He also served from June 1994 to February 1997 as
the Company's Executive Vice President of Acquisitions. Previously, he served
as Senior Vice President/Development Operations of Mediplex from September 1992
and Vice President from June 1991. Mr. Miller served as Regional Operations
Director for New Medico Associates from January 1991 to October 1991.
Previously, Mr. Miller was Vice President of Hospital Operations of Glenbeigh,
Inc., where he was employed from 1979 through 1991.
Eric Moskow, M.D, has served as a director of the Company since September
30, 1996 and has been Executive Vice President of Strategic Planning of the
Company since September 1996. He founded Physician's Choice Management, LLC
("Physician's Choice") in October 1995 and served as its Executive Vice
President from October 1995 to October 1996. Prior to establishing Physician's
Choice, he served as Medical Director for Mediplex of Ridgefield from November
1994 to August 1996 and as Associate Medical Director for US Healthcare in
Connecticut from 1988 to 1990. Dr. Moskow is board-certified in internal
medicine and served as President of the Family Medical Associates of Ridgefield
for nine years.
Bruce A. Rendina has served as a director of the Company since January 29,
1996 and as Vice Chairman of the Board of Directors since March 1997. Mr.
Rendina was the co-founder of DASCO Development Corporation, a medical facility
development company ("DASCO"), and served as its Executive Vice President from
1987 to 1994 and its President since 1994. Prior to founding DASCO, Mr. Rendina
was associated with Coopers & Lybrand LLP from 1975 to 1985.
Hugh L. Carey has served as a director of the Company since February 21,
1996. Currently, he is of counsel to the New York law firm of Whitman Breed
Abbott & Morgan. He served as an Executive Vice President of W.R. Grace &
Company from 1987 to December 1995. He was Governor of the State of New York
from 1975 to 1983 and a member of Congress from 1960 until 1975. He is
currently a director of Triarc Companies, Inc. and China Trust Bank.
Joseph N. Cassese has served as a director of the Company since January
29, 1996. Mr. Cassese was the Vice President of Mediplex from January 1976 to
March 1986 and the President of Mediplex from March 1986 to March 1988 and
again from August 1990 to December 1991. Mr. Cassese was also a Vice President
of A.M.A. Advisory Corp. from April 1988 to August 1990. Mr. Cassese has been
retired since December 1991.
John T. Chay has served as a director of the Company since April 15, 1996.
Mr. Chay has served as an executive officer of Nutrichem, Inc. which he
co-founded in November 1993, and has served since June 1991 as Chief Executive
Officer of The HealthLink Group, Inc., a practice management consulting firm
which he also founded.
David M. Livingston, M.D. has served as a director of the Company since
January 29, 1996. Dr. Livingston has been a Senior Leader of Dana-Farber Cancer
Institute in Boston, Massachusetts since 1991 and has been employed as a
physician at the Institute since 1973. He currently serves as Chairman of the
Institute's Executive Committee for Research and as a Trustee of the Institute.
He is also the Emil Frei Professor of Medicine at Harvard Medical School where
he has taught since 1973.
Stephen E. Ronai has served as a director of the Company since January 29,
1996. Mr. Ronai has been a partner in the Connecticut law firm of Murtha,
Cullina, Richter and Pinney since 1984 where he serves as Chairman of the
firm's Health Care Department. He is a member of the American Academy of
Healthcare Attorneys of the American Hospital Association and the National
Health Lawyers Association. From 1989 to 1995 he served as a member
46
<PAGE>
of the Board of Directors of the National Health Lawyers Association. He also
formerly served as Chairman of the Board of Trustees of the Connecticut
Hospital Association. He is currently a director of CareMatrix Corporation.
The Board of Directors is divided into three classes, with staggered
three-year terms. The terms of Messrs. Gosman, Carey and Chay will expire at
the Company's 1998 annual meeting; the terms of Messrs. Miller, Rendina and
Ronai will expire at the Company's 1999 annual meeting; and the terms of Mr.
Cassese and Drs. Livingston and Moskow will expire at the Company's 2000 annual
meeting. Successors to the directors whose terms expire at each annual meeting
are eligible for election for three-year terms. A director holds office until
the annual meeting for the year in which his term expires and until his
successor is elected and qualified. These provisions may make it more difficult
for holders of the Common Stock to remove the directors and officers of the
Company than if all directors were elected on an annual basis.
Officers are appointed by and serve at the discretion of the Board of
Directors. The officers, other than Mr. Gosman, will devote substantially all
of their business time to the business and affairs of the Company.
Executive Committee. The members of the Executive Committee of the
Company's Board of Directors are Messrs. Gosman, Rendina and Cassese. The
Executive Committee exercises all of the powers of the Board of Directors
between meetings of the Board of Directors, except such powers as are reserved
to the Board of Directors by law.
Audit and Compliance Committee. The members of the Audit and Compliance
Committee of the Company's Board of Directors are Messrs. Carey and Ronai and
Dr. Livingston. The Audit and Compliance Committee makes recommendations
concerning the engagement of independent public accountants, reviews with the
independent public accountants the plans for and results of the audit, approves
professional services provided by the independent public accountants, reviews
the independence of the independent public accountants, considers the range of
audit and non-audit fees and reviews the adequacy of the Company's internal
accounting controls. The Audit and Compliance Committee also oversees the
Company's Compliance Program and the implementation and adherence to the
Company's Standards of Conduct, both of which are designed to ensure
maintenance of high ethical standards and compliance with all legal
(health-care related and other) requirements applicable to the Company.
Compensation Committee. The members of the Compensation Committee of the
Company's Board of Directors are Messrs. Cassese and Carey. The Compensation
Committee establishes a general compensation policy for the Company and
approves increases both in directors' fees and in salaries paid to officers and
senior employees of the Company. The Compensation Committee administers all of
the Company's employee benefit plans including the 1995 Equity Incentive Plan.
The Compensation Committee determines, subject to the provisions of the
Company's plans, the directors, officers, employees and consultants of the
Company eligible to participate in any of the plans, the extent of such
participation and terms and conditions under which benefits may be vested,
received or exercised.
Compensation of Directors
Officers who are members of the Board of Directors do not receive
compensation for serving on the Board. Each other member of the Board receives
annual compensation of $15,000 for serving on the Board, plus a fee of $1,000
for each Board of Directors' meeting attended. In addition, such directors
receive an additional fee of $500 for each committee meeting attended, except
that only one fee will be paid in the event that more than one such meeting is
held on a single day. All directors receive reimbursement of reasonable
expenses incurred in attending Board and committee meetings and otherwise
carrying out their duties. Each non-employee director who was a member of the
Compensation Committee at the time of the closing of the Initial Public
Offering received an option to purchase 10,000 shares of Common Stock at the
offering price pursuant to the Equity Plan. Each director who is a member of
the Compensation Committee on the first business day following each annual
meeting of the shareholders will receive an option to purchase 2,500 shares of
Common Stock. Any of such options granted to a member of the Compensation
Committee under the Equity Plan will be exercisable one year following the date
of grant.
Executive Compensation
The following table sets forth certain information regarding compensation
paid or accrued by the Company during the period June 24, 1994 (inception) to
December 31, 1994, the year ended December 31, 1995 and the fiscal year ended
January 31, 1997, to the Company's Chief Executive Officer and to five other
executive officers of the Company (the "Named Executive Officers").
47
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Awards All Other
Compensation Securities Underlying Compensation(2)
Name and Principal Position Year(1) Salary ($) Options (#) ($)
--------------------------- ------- ------------ --------------------- ---------------
<S> <C> <C> <C> <C>
Abraham D. Gosman .............................. 1997 225,000 -- --
Chairman and Chief Executive Officer 1995 225,000 -- --
1994 116,682 --
Donald A. Sands (3)(4) ........................ 1997 462,026 -- 87,015
Vice President - Medical Facility Development --
Bruce A. Rendina (3) ........................... 1997 435,782 -- 53,948
President of DASCO --
Edward E. Goldman, M.D ........................... 1997 398,473 -- --
Executive Vice President of Physician Development 1995 400,000 -- --
1994 133,333 --
William A. Sanger (5) ........................... 1997 304,976 -- --
Executive Vice President 1995 304,571 -- 174
1994 98,038 --
Francis S. Tidikis (3) ........................ 1997 275,156 150,000 (6) --
Chief Operating Officer
</TABLE>
- ----------------
(1) In January 1996, the Company changed its fiscal year end from December 31
to January 31.
(2) Amounts indicated are for life insurance premiums paid by the Company.
(3) Messrs. Sands, Rendina and Tidikis became executive officers of the Company
in January 1996.
(4) Mr. Sands' employment with the Company terminated in January 1997.
(5) Mr. Sanger's employment with the Company terminated in June 1997.
(6) Represents options granted to Mr. Tidikis on January 23, 1996.
Option Grants in Last Fiscal Year
The following table sets forth certain information regarding options
granted during the 13-month period ended January 31, 1997 by the Company to
each of the Named Executive Officers:
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Rates
of Stock Price Appreciation
Individuals Grants for Option Term (A)
- --------------------------------------------------------------------------------- ----------------------------
% of Total
Number of Options
Securities Granted to Exercise
Underlying Employees or
Options in Fiscal Base Expiration
Name Granted (#) Year Price ($/Sh) Date 5% ($) 10% ($)
- --------------------------- ----------- ---------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Abraham D. Gosman ...... -- --% $ -- -- $ -- $ --
Donald A. Sands ......... -- -- -- -- -- --
Bruce A. Rendina ......... -- -- -- -- -- --
Edward E. Goldman ...... -- -- -- -- -- --
William A. Sanger ...... -- -- -- -- -- --
Francis S. Tidikis ...... 100,000 6.1 15.00 1/23/06 1,636,000 3,493,000
10,000 * 18.375 1/23/06 129,850 315,550
40,000 2.5 (B) 1/23/06 674,400(C) 1,417,200(C)
</TABLE>
- ------------
*Less than 1%.
(A) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of 5% and 10% compounded
annually from the date the respective options were granted to their
expiration date. Actual gains, if any, on
48
<PAGE>
stock option exercises will depend on the future performance of the Common
Stock and the date on which the options are exercised. The Company has not
granted stock appreciation rights to date.
(B) Fair market value on the date such options become exercisable.
(C) Assuming an exercise price of $14.50 (the closing price of the Common Stock
on the Nasdaq National Market on July 11, 1997).
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values.
The Named Executive Officers did not exercise any options during the
fiscal year ended January 31, 1997. As of such date, Mr. Tidikis held options
to purchase 150,000 shares of the Common Stock, 30,000 shares of which were
exercisable. None of the other Named Executive Officers held options as of such
date. The value of the exercisable portion of Mr. Tidikis' options was $17,500
and the value of the unexercisable portion of his options was $70,000. Value is
calculated on the basis of the difference between the option exercise price and
$15.875, the closing price for the Common Stock on the Nasdaq National Market
on January 31, 1997, multiplied by the number of shares of the Common Stock
underlying the option. No value is determinable with respect to Mr. Tidikis'
option to purchase 40,000 shares of the Common Stock which is unexercisable and
which will have its exercise price determined on the date that it becomes
exercisable.
Employment Agreements
The Company, through DASCO, has entered into an employment agreement with
Mr. Rendina that provides for an initial one-year term automatically renewable
for successive one-year periods until either party elects not to renew. The
base salary for Mr. Rendina under the agreement is $330,000 per year. In
addition, he is entitled to receive bonuses and benefits, including life,
accident, health and dental insurance. The agreement may be terminated by the
Company without cause upon 90 days notice and with cause effective immediately
upon notice. The agreement may be terminated by Mr. Rendina immediately upon
notice.
The Company has entered into an employment agreement with Dr. Goldman that
provides for an initial three-year term automatically renewable for an initial
period of two years and for successive periods of one year thereafter, unless
either party elects not to renew. The base salary for Dr. Goldman under the
agreement is $400,000 per year. In addition, he is entitled to receive bonuses
and benefits, including health insurance, dental insurance, short and long term
disability, life insurance and a car allowance. The agreement may be terminated
by the Company without cause upon 180 days' notice and with cause (as defined
in the agreement) effective immediately upon notice. Dr. Goldman may terminate
the agreement immediately if the Company fails to fulfill its obligations
thereunder or without cause upon 30 days' notice. In the event that Dr. Goldman
is terminated without cause, he is entitled to receive his base salary for the
lesser of (i) the remaining term of the then current employment period or (ii)
12 months following the effective date of his termination of employment. The
agreement contains restrictive covenants prohibiting Dr. Goldman from competing
with the Company, or soliciting employees of the Company to leave, during his
employment and for a period of two years after termination of the agreement,
other than after a termination by the Company without cause or by Dr. Goldman
for good reason.
1995 Equity Incentive Plan
The Company maintains the 1995 Equity Incentive Plan (the "Equity Plan"),
which provides for the award ("Award") of up to 4,100,000 shares of Common
Stock in the form of incentive stock options ("ISOs"), non-qualified stock
options ("Non-Qualified Stock Options"), bonus stock, restricted stock,
performance stock units and stock appreciation rights. All employees, directors
and consultants of the Company and any of its subsidiaries are eligible to
participate in the Equity Plan, except directors who are members of the
Compensation Committee (the "Committee"). In addition, certain directors are
eligible for non-discretionary grants under the Equity Plan.
The Equity Plan is administered by the Committee, which determines who
shall receive Awards from those employees and directors who are eligible to
participate in the Equity Plan, the type of Award to be made, the number of
shares of Common Stock which may be acquired pursuant to the Award and the
specific terms and conditions of each Award, including the purchase price,
term, vesting schedule, restrictions on transfer and any other conditions and
limitations applicable to the Awards or their exercise. The purchase price per
share of Common Stock cannot be less than 100% of the fair market value of the
Common Stock on the date of grant with respect to ISOs and
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<PAGE>
not less than 50% of the fair market value of the Common Stock on the date of
grant with respect to Non-Qualified Options. ISOs cannot be exercisable more
than ten years following the date of grant and Non-Qualified Stock Options
cannot be exercisable more than ten years and one day following the date of
grant. The Committee may at any time accelerate the exercisability of all or
any portion of any option.
Each Award may be made alone, in addition to or in relation to any other
Award. The terms of each Award need not be identical, and the Committee need
not treat participants uniformly. Except as otherwise provided by the Equity
Plan or a particular Award, any determination with respect to an Award may be
made by the Committee at the time of award or at any time thereafter. The
Committee determines whether Awards are settled in whole or in part in cash,
Common Stock, other securities of the Company, Awards or other property. The
Committee may permit a participant to defer all or any portion of a payment
under the Equity Plan, including the crediting of interest on deferred amounts
denominated in Common Stock. Such a deferral may have no effect for purposes of
determining the timing of taxation of payments. In the event of certain
corporate events, including a merger, consolidation, dissolution, liquidation
or the sale of substantially all of the Company's assets, all Awards become
fully exercisable and realizable.
The Committee may amend, modify or terminate any outstanding Award,
including substituting therefor another Award of the same or a different type,
changing the date of exercise or realization, and converting an ISO to a
Non-Qualified Stock Option, if the participant consents to such action, or if
the Committee determines that the action would not materially and adversely
affect the participant. Awards may not be made under the Equity Plan after
November 14, 2005, but outstanding Awards may extend beyond such date.
The number of shares of Common Stock issuable pursuant to the Equity Plan
may not be changed except by approval of the stockholders. However, in the
event that the Committee determines that any stock dividend, extraordinary cash
dividend, creation of a class of equity securities, recapitalization,
reorganization, merger, consolidation, split-up, spin-off, combination,
exchange of shares, warrants or rights offering to purchase Common Stock at a
price substantially below fair market value, or other similar transaction
affects the Common Stock such that an adjustment is required to preserve the
benefits intended to be made available under the Equity Plan, the Committee may
adjust equitably the number and kind of shares of stock or securities in
respect of which Awards may be made under the Equity Plan, the number and kind
of shares subject to outstanding Awards, and the award, exercise or conversion
price with respect to any of the foregoing, and if considered appropriate, the
Committee may make provision for a cash payment with respect to an outstanding
Award. In addition, upon the adoption of a plan or agreement concerning a
change in control, sale of substantially all the assets, or liquidation or
dissolution of the Company, all Awards which are not then fully exercisable or
realizable become so. Common Stock subject to Awards which expire or are
terminated prior to exercise or Common Stock which has been forfeited under the
Equity Plan will be available for future Awards under the Equity Plan. Both
treasury shares and authorized but unissued shares may be used to satisfy
Awards under the Equity Plan.
The Equity Plan may be amended from time to time by the Board of Directors
or terminated in its entirety; however, no amendment may be made without
stockholder approval if such approval is necessary to comply with any
applicable tax or regulatory requirement, including any requirement for
stockholder approval under Section 16(b) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or any successor provision.
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CERTAIN TRANSACTIONS
The Company was incorporated in October 1995 to combine the business
operations of certain companies (the "Related Companies") controlled by Mr.
Gosman. During 1994 and 1995, the Related Companies and Mr. Gosman completed
the acquisition of various companies and businesses which were transferred to
the Company simultaneously with the closing of the Company's initial public
offering on January 29, 1996 (the "Formation").
At December 31, 1995 the Company had a $19.5 million loan from
NationsBank, which was guaranteed by Mr. Gosman. Mr. Gosman did not receive any
consideration for this or any other guarantee he has provided on behalf of the
Company. The $19.5 million loan was repaid from the net proceeds of the
Company's January 1996 initial public offering. After repayments to Mr. Gosman
made from the net proceeds of the initial public offering totalling $28.7
million, the Company owed Mr. Gosman approximately $10.8 million, which was
repaid from the net proceeds of the Company's June 1996 issuance of convertible
subordinated debentures (the "Debentures"). All amounts loaned to the Company
by Mr. Gosman accrued interest at a floating rate equal to NationsBank's prime
rate. The Company agreed to repay in full the amount owed to Mr. Gosman from
the proceeds of any public offering by the Company of its debt or equity
securities; and to repay Mr. Gosman from the proceeds of any institutional debt
financing by the Company for working capital purposes, except that the amount
to be repaid from such institutional debt financing proceeds would not exceed
25% of the maximum amount available to be borrowed under the terms of the
financing. Pursuant to such agreement, the $11.7 million the Company owed Mr.
Gosman (including additional amounts borrowed since the closing of the initial
public offering) was repaid from the net proceeds of the Debentures.
In connection with the acquisition of Oncology Therapies, Inc. in March
1995, Mr. Gosman guaranteed until the later of the satisfaction of certain
financial covenants or July 31, 1998 the repayment by a subsidiary of the
Company of a portion of the $17.5 million in acquisition financing from FINOVA
Capital Corporation ("FINOVA"). Mr. Gosman's liability under the guarantee was
limited to no more than $6.1 million. The Company used the net proceeds of the
initial public offering to repay in full its obligations to FINOVA.
During 1995, in addition to the guarantee discussed above, Mr. Gosman
guaranteed the payment by the Company of indebtedness in the amount of $4.6
million incurred in connection with the acquisition of DASCO, all of which was
repaid during 1996. In addition, Mr. Gosman executed a reimbursement agreement
and provided collateral for a letter of credit to secure other indebtedness of
the Company in the amount of $5.4 million incurred in connection with the
acquisition of Oncology & Radiation Associates, P.A. Upon the closing of the
initial public offering, the Company obtained the release of Mr. Gosman from
these guarantees and from his other obligations with respect to acquisition
indebtedness through the assumption by the Company of Mr. Gosman's obligation
to pay such Acquisition indebtedness and of the obligation to provide cash
collateral for the letter of credit.
The Company occupies office space for its principal offices in West Palm
Beach, Florida under the terms of a lease which the Company assumed from a
company the stockholders and executive officers of which include Messrs.
Gosman, Leathers and Miller and Dr. Goldman. The Company estimates that the
total amount of lease payments to be made under the assumed lease through the
end of the current lease term will equal approximately $1 million.
In connection with the Formation, the following executive officers and
directors of the Company received the indicated number of shares of Common
Stock in exchange for their shares of common stock of the Related Companies:
Mr. Gosman (including shares held for the benefit of his two adult sons),
8,282,305; Mr. Rendina, 916,667; Mr. Chay, 133,333; Mr. Leathers, 459,505; Mr.
Miller, 459,505; and Dr. Goldman, 168,112.
DASCO provides development and other services in connection with the
establishment of health parks, medical malls and medical office buildings.
DASCO provides these services to or for the benefit of the owners of the new
facilities, which owners are either corporations or limited partnerships. Mr.
Rendina had obtained equity interests in the entities which own 31 of the 35
facilities developed by DASCO. The interests of Mr. Rendina range from 2% to
50%. In addition, Mr. Gosman individually and as trustee for his two sons and
Messrs. Leathers and Miller and Dr. Goldman have obtained limited partnership
interests ranging from 7% to 42% in the entities which own 14 facilities being
developed by the Company through DASCO. During the six months ended July 31,
1997 DASCO recorded revenues in the amount of approximately $2.8 million
related to facilities developed by DASCO in which equity interests have been
obtained by related parties.
The Company provides construction management, development marketing and
consulting services to entities principally owned by Mr. Gosman in connection
with the development and operation by such entities of several
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medical facilities. During the six months ended July 31, 1997, the Company
recorded revenues in the amount of approximately $7.1 million related to such
services. The Company provides these services to affiliated parties on terms no
less favorable to the Company than those provided to unaffiliated parties.
Meditrust, a publicly traded real estate investment trust with assets in
excess of $2.3 billion dollars of which Mr. Gosman is the Chairman of the Board
and Chief Executive Officer, has provided or has committed to provide financing
in the aggregate amount of $305.5 million for the development of 23 facilities
developed by the Company.
Mr. Ronai is a partner in the Connecticut law firm of Murtha, Cullina,
Richter and Pinney which has been retained to perform certain legal services
for the Company.
During December 1995, the Company obtained a 43.75% interest in Physicians
Choice Management, LLC, a newly formed management services organization that
provides management services to an independent physician association composed
of over 400 physicians based in Connecticut ("Physician's Choice"). The Company
acquired this interest in exchange for a payment of $1.5 million to the
stockholders of Physician's Choice, including Dr. Moskow. During September
1996, the Company acquired the remaining 56.25% interest from such stockholders
for a payment of $1 million in cash plus 363,442 shares of the Company's Common
Stock.
As of July 31, 1997 the Company loaned the shareholders of Physician's
Choice, including Dr. Moskow, an aggregate of $2.7 million to pay the tax
liability related to the sale of Physician's Choice. The loans are secured by a
pledge of the Common Stock held by the former shareholders of Physician's
Choice.
The Company leases space on behalf of its affiliated physicians from a
related entity. Mr. Gosman owns a limited partnership interest in the limited
partnership which is general partner of the limited partnership which owns the
medical mall. The aggregate base rent under such leases is approximately
$537,000.
During November 1994, the Company acquired Nutrichem. In connection with
the acquisition, the Company was required to make contingent note payments of
$4.4 million to the stockholders of Nutrichem, including Mr. Chay. The Company
paid in full the contingent note with the proceeds of the initial public
offering.
In connection with an acquisition, the Company was required to assume an
unfavorable lease which was assigned in January 1997 to an entity principally
owned by Mr. Gosman. The difference between the cost and value of the lease is
approximately $559,000.
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PRINCIPAL STOCKHOLDERS
The following table sets forth, as of October 28, 1997, certain
information regarding the beneficial ownership of shares of Common Stock by
each person known by the Company to be the beneficial owner of more than 5% of
outstanding Common Stock, by each director and each of the Named Executive
Officers of the Company and by all directors and executive officers as a group.
Except as indicated in the footnotes, all of such shares of Common Stock set
forth in the following table are owned directly, and the indicated person has
sole voting and investment power with respect to all Common Stock shown as
beneficially owned by such person:
<TABLE>
<CAPTION>
Amount of Beneficial Ownership
-------------------------------
Shares
Beneficially Percentage
Name Owned Owned
- ---- -------------- ----------------
<S> <C> <C>
Abraham D. Gosman (1) ................................................ 8,487,126 28.7%
Walter Brown (2) ...................................................... 2,442,756 8.3
Putnam Investments, Inc. (3) .......................................... 2,124,449 7.2
Ronald E. Phillips (4) ................................................ 1,539,404 5.2
Donald A. Sands ...................................................... 892,499 3.0
Bruce A. Rendina ...................................................... 892,499 3.0
Edward E. Goldman, M.D. ............................................. 126,112 *
William A. Sanger ...................................................... 266,224 *
Francis S. Tidikis (5) ................................................ 31,085 *
Hugh L. Carey ......................................................... -- *
Joseph N. Cassese (6) ................................................ 30,000 *
John T. Chay ......................................................... 102,833 *
David M. Livingston, M.D. ............................................. -- *
Eric Moskow (7) ...................................................... 135,252 *
Stephen E. Ronai (8) ................................................ 14,000 *
All directors and executive officers as a group (14 persons) (9) ...... 10,765,067 36.4
</TABLE>
- --------------
* Less than one percent.
(1) Includes 4,000,000 shares held by Mr. Gosman as trustee for the benefit of
his two adult sons. Mr. Gosman's business address is PhyMatrix Corp., 777
South Flagler Drive, West Palm Beach, FL 33401.
(2) Mr. Brown's address is 106 Driftwood Drive, Tiverton, RI 02878.
(3) Putnam Investment Management, Inc. ("PIM") and Putnam Advisory Company,
Inc. ("PAC") are investment adviser subsidiaries of Putnam Investments,
Inc. ("PIT"). PIM and PAC have shared dispositive power with respect to
such shares, and PAC has shared voting power with respect to certain of
such shares. The address of PIT, PIM and PAC is One Post Office Square,
Boston, Massachusetts 02109. The foregoing is based upon the Schedule 13G
dated January 31, 1997 filed by PIT, PIM and PAC.
(4) Represents shares held by Mr. Phillips as trustee. Mr. Phillips address is
341 West 48th Street, New York, NY 10036.
(5) Includes 85 shares owned by Mr. Tidikis' wife with respect to which Mr.
Tidikis disclaims beneficial ownership and 30,000 shares which Mr. Tidikis
has the right to acquire beneficial ownership of upon exercise of an
option.
(6) Includes 10,000 shares which Mr. Cassese has the right to acquire beneficial
ownership of upon exercise of an option.
(7) Includes 60,000 shares which Dr. Moskow has the right to acquire beneficial
ownership of upon exercise of an option.
(8) Includes 10,000 shares which Mr. Ronai has the right to acquire beneficial
ownership of upon exercise of an option.
(9) Includes 135,000 shares which the directors and executive officers have the
right to acquire beneficial ownership of upon exercise of options.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 41,000,000 shares
of capital stock, which includes 40,000,000 shares of Common Stock and
1,000,000 shares of preferred stock ("Preferred Stock").
Common Stock
Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be submitted to a vote of the stockholders, and such
holders do not have cumulative voting rights. Subject to preferences that may
be applicable to any outstanding shares of Preferred Stock, holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors of the Company out of
funds legally available therefor. See "Dividend Policy." All outstanding shares
of Common Stock are, and the shares to be sold in the offering when issued and
paid for will be, fully paid and nonassessable and the holders thereof will
have no preferences or conversion, exchange or pre-emptive rights. In the event
of any liquidation, dissolution or winding-up of the affairs of the Company,
holders of Common Stock will be entitled to share ratably in the assets of the
Company remaining after payment or provision for payment of all of the
Company's debts and obligations and liquidation payments to holders of
outstanding shares of Preferred Stock, if any.
Preferred Stock
The Preferred Stock, if issued, would have priority over the Common Stock
with respect to dividends and to other distributions, including the
distribution of assets upon liquidation. The Preferred Stock may be issued in
one or more series without further stockholder authorization, and the Board of
Directors is authorized to fix and determine the terms, limitations and
relative rights and preferences of the Preferred Stock, to establish series of
Preferred Stock and to fix and determine the variations as among series. The
Preferred Stock, if issued, may be subject to repurchase or redemption by the
Company. The Board of Directors, without approval of the holders of the Common
Stock, can issue Preferred Stock with voting and conversion rights (including
multiple voting rights) which could adversely affect the rights of holders of
Common Stock. In addition to having a preference with respect to dividends or
liquidation proceeds, the Preferred Stock, if issued, may be entitled to the
allocation of capital gains from the sale of the Company's assets. Although the
Company has no present plans to issue any shares of Preferred Stock following
the closing of the offering, the issuance of shares of Preferred Stock, or the
issuance of rights to purchase such shares, may have the effect of delaying,
deferring or preventing a change in control of the Company or an unsolicited
acquisition proposal.
Classified Board of Directors
The Charter and By-laws of the Company provide for the Board of Directors
to be divided into three classes of directors, as nearly equal in number as is
reasonably possible, serving staggered terms so that directors' terms will
expire either at the 1998, 1999 or 2000 annual meeting of the stockholders. At
each annual meeting of the stockholders, directors who are members of the class
whose terms expire at that annual meeting are elected to serve for three-year
terms. See "Management."
The Company believes that a classified Board of Directors will help to
assure the continuity and stability of the Board of Directors and the Company's
business strategies and policies as determined by the Board of Directors, since
a majority of the directors at any given time will have had prior experience as
directors of the Company. The Company believes that this, in turn, will permit
the Board of Directors to more effectively represent the interests of its
stockholders.
With a classified Board of Directors, at least two annual meetings of
stockholders, instead of one, generally will be required to effect a change in
the majority of the Board of Directors. As a result, a provision relating to a
classified Board of Directors may discourage proxy contests for the election of
directors or purchases of a substantial block of the Common Stock because such
a provision could operate to prevent a rapid change in control of the Board of
Directors. The classification provision also could have the effect of
discouraging a third party from making a tender offer or otherwise attempting
to obtain control of the Company. Under the Certificate of Incorporation, a
director of the Company may be removed only for cause by a vote of the holders
of at least 75% of the outstanding shares of the capital stock of the Company
entitled to vote in the election of directors.
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Advance Notice Provisions for Stockholder Proposals and Stockholder Nominations
of Directors
The By-laws establish an advance notice procedure with regard to the
nomination by the stockholders of the Company of candidates for election as
directors (the "Nomination Procedure") and with regard to other matters to be
brought by stockholders before a meeting of stockholders of the Company (the
"Business Procedure").
The Nomination Procedure requires that a stockholder give written notice
to the Secretary of the Company, delivered to or mailed and received at the
principal executive officers of the corporation not less than 60 days nor more
than 90 days prior to the meeting, in proper form, of a planned nomination for
the Board of Directors. Detailed requirements as to the form and timing of that
notice are specified in the By-laws. If the Chairman of the Board of Directors
determines that a person was not nominated in accordance with the Nomination
Procedure, such person will not be eligible for election as a director.
Under the Business Procedure, a stockholder seeking to have any business
conducted at an annual meeting must give written notice to the Secretary of the
Company, delivered to or mailed and received at the principal executive
officers of the corporation not less than 60 days nor more than 90 days prior
to the meeting, in proper form. Detailed requirements as to the form and timing
of that notice are specified in the By-laws. If the Chairman of the Board of
Directors determines that such business was not properly brought before such
meeting in accordance with the Business Procedure, such business will not be
conducted at such meeting.
Although the By-laws do not give the Board of Directors any power to
approve or disapprove stockholder nominations for the election of directors or
of any other business desired by stockholders to be conducted at an annual or
any other meeting, the By-laws (i) may have the effect of precluding a
nomination for the election of directors or precluding the conduct of business
at a particular annual meeting if the proper procedures are not followed or
(ii) may discourage or deter a third party from conducting a solicitation of
proxies to elect its own slate of directors or otherwise attempting to obtain
control of the Company, even if the conduct of such solicitation or such
attempt might be beneficial to the Company and its stockholders.
Fair Price Provision for Certain Business Combinations
The Company's Certificate of Incorporation contains a provision which
requires that certain proposed business combinations (the "Business
Combinations") between the Company or any of its subsidiaries, individually,
and an "Interested Stockholder" (as defined below) either must be (i) approved
by the Board of Directors of the Company, provided a majority of "Continuing
Directors" (as defined below) voted in favor of such transaction, or (ii) for a
certain minimum sum, determined by a fixed formula as set forth in the
Company's charter.
An "Interested Stockholder" is defined in the Certificate of Incorporation
as (i) any beneficial owner, either directly or indirectly, of 10% or more of
the voting power of the outstanding voting stock of the Company immediately
prior to a proposed Business Combination, who was not a beneficial owner one
week before the closing of the Company's initial public offering, (ii) an
Affiliate (as defined in the Exchange Act) of the Company who was not an
Affiliate one week before the closing of the Company's initial public offering,
or (iii) an assignee of or a successor in interest to the beneficial ownership
of any shares of capital stock which were within two years prior thereto
beneficially owned by a person under clause (i) hereof, so long as such
assignment or succession shall have occurred in the course of a transaction or
series of transactions not involving a public offering, within the meaning of
the Securities Act, as amended. As a result of the foregoing, Mr. Gosman and
certain other stockholders of the Company prior to the closing of the Company's
initial public offering would not be deemed to be an Interested Stockholders
and would, therefore, not be subject to this provision.
A "Continuing Director" is either (i) a director who is not an Affiliate
or Associate (as defined in the Exchange Act) of an Interested Stockholder and
who was a director of the Company prior to that time when the Interested
Stockholder became an Interested Stockholder, or (ii) a director who is so
designated by a majority of the Continuing Directors then serving on the
Company's Board of Directors.
The Company believes that this provision will ensure that in the event of
a proposal of a certain business combination with an interested party, the
stockholders of the Company will not be coerced into selling their shares or
will receive a fair price in consideration therefor. This provision could make
certain business combinations with particular parties more difficult and could
discourage an Interested Stockholder from contemplating or attempting a
Business Combination with the Company.
55
<PAGE>
Other Provisions
Special Meetings of the Stockholders of the Company. The Company' By-laws
provide that a special meeting of the stockholders of the Company may be called
only by the Chairman of the Board of Directors or by order of the Board of
Directors. This provision prevents stockholders from calling a special meeting
of stockholders and potentially limits the stockholders' ability to offer
proposals to meetings of stockholders, if no special meetings are otherwise
called by the Chairman or the Board or Board of Directors.
Amendment of the By-laws. The Company's Certificate of Incorporation
provides that the By-laws only may be amended only by a vote of the directors
or by a rate of at least 75% of the outstanding shares of the Company's stock
entitled to vote in the election of directors.
No Action by Written Consent. The Company's Certificate of Incorporation
does not permit the Company's stockholders to act by written consent. As a
result, any action to be taken by the Company's stockholders must be taken at a
duly called meeting of the stockholders.
Delaware Takeover Statute
The Company is subject to Section 203 of the DGCL which, with certain
exceptions, prohibits a Delaware corporation from engaging in any of a broad
range of business combinations with any "interested stockholder" for a period
of three years following the date that such stockholder became an interested
stockholder, unless: (i) prior to such date, the Board of Directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (a) by persons who are directors and officers
and (b) by employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer, or (iii) on or after such date, the
business combination is approved by the Board of Directors and authorized at an
annual or special meeting of stockholders by the affirmative vote of at least
662/3% of the outstanding voting stock which is not owned by the interested
stockholder. An "interested stockholder" is defined as any person that is (a)
the owner of 15% or more of the outstanding voting stock of the corporation or
(b) an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
Registration Rights
In connection with the Initial Public Offering, the Company issued
13,307,450 shares of Common Stock to certain management and founder
stockholders. In addition, in connection with acquisitions completed through
August 31, 1997, the Company issued or agreed to issue an additional 3,996,610
shares of restricted stock assuming, with respect to the shares which have yet
to be issued, that the issue price (which is based on the average price of the
Common Stock during the five business days preceding the issuance) is $15.63,
the closing price of the Common Stock on the Nasdaq National Market on
September 22, 1997. All of these shares are "restricted securities" within the
meaning of the Securities Act. Unless the resale of the shares is registered
under the Securities Act, these shares may not be sold in the open market until
after the first anniversary of the date they were acquired and then only in
compliance with the applicable requirements of Rule 144. In July 1997, the
Company filed a registration statement under the Securities Act registering the
resale of 1,657,560 of such shares of restricted stock. The Company also has
granted rights to the holders of most of the shares of restricted stock to have
their shares registered under the Securities Act.
In connection with the Debt Offering, the Company filed a registration
statement on Form S-1 with the Commission relating to the resale of
$100,000,000 aggregate principal amount of the Debentures, and the resale of up
to 3,546,099 shares of the Common Stock initially issuable upon conversion of
the Debentures by any holders of the Debentures that did not purchase the
Debentures under the registration statement.
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<PAGE>
PLAN OF DISTRIBUTION
This Prospectus related to 5,000,000 shares of Common Stock of the Company
that may be offered and issued by the Company from time to time in connection
with acquisitions of other businesses or properties by the Company.
The Company intends to concentrate its acquisitions in areas related to
the current business of the Company. If the opportunity arises, however, the
Company may attempt to make acquisitions that are either complementary to its
present operations or which it considers advantageous even though they may be
dissimilar to its present activities. The consideration for any such
acquisition may consist of shares of Common Stock, cash, notes or other
evidences of debt, assumptions of liabilities or a combination thereof, as
determined from time to time by negotiations between the Company and the owners
or controlling persons of businesses or properties to be acquired.
The shares covered by this Prospectus may be issued in exchange for shares
of capital stock, partnership interests or other assets representing an
interest, direct or indirect, in other companies or other entities, in exchange
for assets used in or related to the business of such companies or entities, or
otherwise pursuant to the agreements providing for such acquisitions. The terms
of such acquisitions and of the issuance of shares of Common Stock under
acquisition agreements will generally be determined by direct negotiations with
the owners or controlling persons of the businesses or properties to be
acquired or, in the case of entities that are more widely held, through
exchange offers to stockholders or documents soliciting the approval of
statutory mergers, consolidations or sales of assets. It is anticipated that
the shares of Common Stock issued in any such acquisition will be valued at a
price reasonably related to the market value of the Common Stock either at the
time of agreement on the terms of an acquisition or at or about the time of
delivery of the shares.
It is not expected that underwriting discounts or commissions will be paid
by the Company in connection with issuances of shares of Common Stock under
this Prospectus. However, finders' fees or brokers' commissions may be paid
from time to time in connection with specific acquisitions, and such fees may
be paid through the issuance of shares of Common Stock covered by this
Prospectus. Any person receiving such a fee may be deemed to be an underwriter
within the meaning of the Securities Act.
Affiliates of companies or practices acquired by the Company who receive
Common Stock under this Prospectus are subject for one year to the restrictions
of Rule 145 under the Securities Act, including the volume of sale limitations
and manner of sale requirements of Rule 145. The requirements of Rule 145 may
limit the ability of such affiliates to resell Common Stock they receive under
this Prospectus.
VALIDITY OF COMMON STOCK
Certain legal matters in connection with the shares of Common Stock being
offered hereby will be passed upon by Nutter, McClennen & Fish, LLP, Boston,
Massachusetts, counsel to the Company.
EXPERTS
The consolidated financial statements of PhyMatrix Corp. for the fiscal
year ended January 31, 1997 and the one month period ended January 31, 1996 and
combined financial statements of PhyMatrix Corp. for the year ended December 31,
1995 and for the period from June 24, 1994 (inception) through December 31,
1994, included in this Prospectus and appearing elsewhere in this Registration
Statement have been included herein in reliance upon the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
The combined financial statements of Clinical Studies Ltd. and Clinical
Marketing Ltd. for the fiscal years ended December 31, 1996 and 1995, included
in this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and is included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
The consolidated supplemental financial statements of PhyMatrix Corp. for
the fiscal year ended January 31, 1997 and combined supplemental financial
statements of PhyMatrix Corp. for the years ended December 31, 1995 and
December 31, 1994, included in this Prospectus and appearing elsewhere in this
Registration Statement have
57
<PAGE>
been included herein in reliance upon the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the United States Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-4 (together
with all amendments, exhibits and schedules thereto, the "Registration
Statement") under the Securities Act covering the shares of Common Stock. This
Prospectus does not contain all the information set forth in the Registration
Statement, and the exhibits and schedules thereto. For further information,
with respect to the Company and the Common Stock, reference is made to the
Registration Statement, and the exhibits and schedules thereto, which can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices located at Seven World
Trade Center, 13th Floor, New York, New York 10048 and the Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission
maintains a web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that submit
electronic filings to the Commission. Statements made in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete, and reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files periodic reports and other information
with the Commission. For further information with respect to the Company,
reference is hereby made to such reports and other information which can be
inspected and copied at the public reference facilities maintained by the
Commission referenced above.
The Company's Common Stock is listed for trading on Nasdaq under the
trading symbol "PHMX." Reports, proxy statements and other information about
the Company also may be inspected at the offices of Nasdaq Operations, 1735 K
Street, N.W., Washington, D.C. 20006.
58
<PAGE>
PHYMATRIX CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PHYMATRIX CORP.
Balance Sheets--July 31, 1997 (unaudited) and January 31, 1997 ........................ F-2
Statements of Operations--three and six months ended July 31, 1997 (unaudited) and
three and six months ended July 31, 1996 (unaudited) ................................. F-3
Statements of Cash Flows--six months ended July 31, 1997 (unaudited) and
six months ended July 31, 1996 (unaudited) ............................................. F-4
Notes to Financial Statements (unaudited) ............................................. F-5
PHYMATRIX CORP.
Report of Independent Accountants ...................................................... F-8
Balance Sheets as of January 31, 1997, January 31, 1996 and December 31, 1995 ......... F-9
Statements of Operations for the year ended January 31, 1997, the month ended
January 31, 1996, the year ended December 31, 1995 and the period from
June 24 (inception) to December 31, 1994 ............................................. F-10
Statements of Changes in Shareholders' Equity for the year ended January 31, 1997,
the month ended January 31, 1996, the year ended December 31, 1995 and
the period from June 24 (inception) to December 31, 1994 .............................. F-11
Statements of Cash Flows for the year ended January 31, 1997, the month ended
January 31, 1996, the year ended December 31, 1995 and the period from
June 24 (inception) to December 31, 1994 ............................................. F-12
Notes to Financial Statements ......................................................... F-13
CLINICAL STUDIES LTD. AND CLINICAL MARKETING LTD.
Report of Independent Accountants ...................................................... F-37
Combined Balance Sheets as of December 31, 1996 and 1995 .............................. F-38
Combined Statements of Operations for the years ended December 31, 1996 and 1995 ...... F-39
Combined Statements of Stockholders' Equity for the years ended December 31, 1996 and
1995 .................................................................................. F-40
Combined Statements of Cash flows for the years ended December 31, 1996 and 1995 ...... F-41
Notes to Combined Financial Statements ................................................ F-42
PHYMATRIX CORP.
Report of Independent Accountants ...................................................... F-52
Supplemental Balance Sheets as of July 31, 1997 (unaudited) January 31, 1997, and
December 31, 1995 ..................................................................... F-53
Supplemental Statements of Operations for the six months ended July 31, 1997 and 1996
(unaudited) and the years ended January 31, 1997, December 31, 1995 and
December 31, 1994 .................................................................... F-54
Supplemental Statements of Changes in Shareholders' Equity for the six months ended July
31, 1997 (unaudited) and the years ended January 31, 1997, December 31, 1995 and
December 31, 1994 .................................................................... F-55
Supplemental Statements of Cash Flows for the six months ended July 31, 1997 and 1996
(unaudited) and the years ended January 31, 1997, December 31, 1995 and
December 31, 1994 .................................................................... F-56
Notes to Supplemental Financial Statements ............................................. F-57
Supplemental Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................................. F-87
</TABLE>
F-1
<PAGE>
PHYMATRIX CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, 1997 January 31, 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.
F-2
<PAGE>
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.
F-3
<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.
F-4
<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 Company's audited financial
statements and notes thereto included elsewhere in this Prospectus as of
January 31, 1997 and January 31, 1996 and for the year ended January 31, 1997,
the one-month period ended January 31, 1996 and the year ended December 31,
1995. 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.
F-5
<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three and Six Months Ended July 31, 1997 and 1996 (Unaudited)
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.
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
F-6
<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three and Six Months Ended July 31, 1997 and 1996 (Unaudited)
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 63/4% 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 notes
convertible into shares of Common Stock.
F-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of PhyMatrix Corp. (formerly known as Continuum Care
Corporation):
We have audited the consolidated balance sheets of PhyMatrix Corp.
(formerly known as Continuum Care Corporation) as of January 31, 1997 and
January 31,1996 and the related consolidated statements of operations, changes
in shareholders' equity and cash flows for the year ended January 31, 1997 and
for the one month period ended January 31, 1996. We have also audited the
accompanying combined balance sheet of PhyMatrix Corp. as of December 31, 1995
and the related statements of operations, changes in shareholders' equity and
cash flows for the year ended December 31, 1995 and the period from June 24,
1994 (inception) to December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of PhyMatrix
Corp. as of January 31, 1997 and January 31, 1996 and the consolidated results
of its operations and its cash flows for the year ended January 31, 1997 and
for the one month period ended January 31, 1996 in conformity with generally
accepted accounting principles. Further, in our opinion, the financial
statements referred to above present fairly in all material respects, the
combined financial position of PhyMatrix Corp. as of December 31, 1995 and the
combined results of its operations and its cash flows for the year ended
December 31, 1995 and the period from June 24, 1994 (inception) to December 31,
1994 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 13, 1997 except as to the information presented in Note 20,
for which the date is April 24, 1997
F-8
<PAGE>
PHYMATRIX CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
Consolidated Consolidated Combined
--------------- --------------- -----------------
January 31, January 31, December 31,
1997 1996 1995
--------------- --------------- -----------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents .................................... $ 79,893,679 $ 46,113,619 $ 3,596,913
Receivables:
Accounts receivable, net of allowances of
$29,247,122, $16,565,423 and $13,976,651 at
January 31, 1997, January 31, 1996 and
December 31, 1995, respectively ........................ 35,846,268 21,562,477 20,710,846
Other receivables ....................................... 2,318,395 678,411 569,923
Notes receivable (Note 4) ................................. 10,125,000 -- 516,000
Prepaid expenses and other current assets .................. 3,680,709 1,202,399 1,276,535
------------- ------------- -------------
Total current assets .................................... 131,864,051 69,556,906 26,670,217
Property, plant and equipment, net (Note 5) ..................... 38,666,523 38,719,086 39,359,328
Notes receivable (Note 4) ....................................... 4,938,700 100,000 170,400
Goodwill, net (Note 2) .......................................... 67,169,274 44,979,865 31,931,453
Management service agreements, net (Note 2) ..................... 40,196,102 15,816,042 16,376,636
Investment in affiliates (Note 6) .............................. 3,399,859 3,256,783 12,925,129
Other assets (including restricted cash) ........................ 11,889,338 7,578,791 4,753,710
------------- ------------- -------------
Total assets ............................................. $ 298,123,847 $ 180,007,473 $ 132,186,873
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of debt and capital leases (Note 8) ......... $ 3,745,500 $ 2,552,306 $ 26,662,510
Current portion of related party debts (Note 8) ............ -- 4,740,588 4,740,588
Due to shareholder--current (Notes 8 and 11) ............... -- 5,376,000 --
Accounts payable ............................................. 7,728,234 5,333,791 5,353,210
Accrued compensation ....................................... 1,480,250 1,151,268 1,124,316
Accrued and other current liabilities (Note 7) ............... 11,444,940 6,194,108 9,367,532
Accrued interest--shareholder (Note 11) ..................... -- -- 1,708,174
------------- ------------- -------------
Total curent liabilities ................................. 24,398,924 25,348,061 48,956,330
Due to shareholder, less current portion (Notes 8 and 11) ...... -- 10,147,287 36,690,180
Long-term debt and capital leases, less current maturities
(Note 8) ...................................................... 7,676,950 13,653,437 28,847,923
Convertible subordinated debentures .............................. 100,000,000 -- --
Other long term liabilities (Notes 3 and 7) ..................... 14,004,143 2,314,544 2,511,122
Deferred tax liability (Note 14) .............................. 1,354,182 -- --
Minority interest ............................................. 1,798,321 1,335,167 2,502,970
------------- ------------- -------------
Total liabilities ....................................... 149,232,520 52,798,496 119,508,525
Commitments and contingencies (Notes 9 and 10)
Shareholders' equity:
Common Stock, par value $.01; 40,000,000 shares
authorized; 22,421,033 and 21,529,950 shares issued
and outstanding at January 31, 1997 and January 31,
1996, respectively .......................................... 224,210 215,300 --
Additional paid in capital ................................. 149,329,506 140,491,557 25,000,000
Retained earnings (deficit) ................................. (662,389) (13,497,880) (12,321,652)
------------- ------------- -------------
Total shareholders' equity .............................. 148,891,327 127,208,977 12,678,348
------------- ------------- -------------
Total liabilities and shareholders' equity ............... $ 298,123,847 $ 180,007,473 $ 132,186,873
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-9
<PAGE>
PHYMATRIX CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Consolidated Consolidated Combined Combined
-------------- -------------- ----------------- ---------------
Period From
One Month June 24
Year Ended Ended Year Ended (Inception) to
January 31, January 31, December 31, December 31,
1997 1996 1995 1994
-------------- -------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Net revenues from services ........................ $99,773,277 $ 4,636,127 $ 48,360,716 $ 2,446,821
Net revenue from management service
agreements ....................................... 90,187,458 6,079,109 22,372,566 --
------------ ------------ ------------- ------------
Total revenue ................................. 189,960,735 10,715,236 70,733,282 2,446,821
------------ ------------ ------------- ------------
Operating costs and administrative expenses:
Cost of affiliated physician management
services ....................................... 42,245,211 2,796,623 9,655,973 --
Salaries, wages and benefits ..................... 52,313,062 3,636,973 29,708,554 1,207,750
Salaries, wages and benefits--related party
(Note 11) ....................................... -- -- 2,267,891 934,200
Professional fees .............................. 4,119,161 287,095 2,571,459 58,665
Professional fees--related party (Note 11) ...... -- -- 273,941 253,995
Supplies ....................................... 26,939,628 1,916,013 11,864,514 404,911
Utilities ....................................... 2,562,328 175,653 1,307,564 77,416
Depreciation and amortization .................. 7,144,588 535,300 3,862,519 107,387
Rent ............................................. 7,653,298 565,106 4,043,465 56,244
Rent--related party (Note 11) .................. -- -- 459,732 192,242
Earn out payment (Note 11) ..................... -- -- 1,271,000 --
Provision for closure loss (Note 7) ............ -- -- 2,500,000 --
Provision for bad debts ........................ 4,607,888 256,989 744,111 --
Other .......................................... 22,534,066 880,595 6,216,313 106,363
Other--related party (Note 11) .................. -- -- 728,116 249,316
------------ ------------ ------------- ------------
170,119,230 11,050,347 77,475,152 3,648,489
------------ ------------ ------------- ------------
Interest expense, net .............................. 1,288,837 551,607 3,144,027 95,069
Interest expense shareholder (Note 11) ............ 369,366 259,888 1,708,174 --
(Income) loss from investment in affiliates ......... (709,295) 29,622 (569,156) --
------------ ------------ ------------- ------------
948,908 841,117 4,283,045 95,069
------------ ------------ ------------- ------------
Income (loss) before provision for income taxes . 18,892,597 (1,176,228) (11,024,915) (1,296,737)
Income tax expense ................................. 6,836,066 -- -- --
------------ ------------ ------------- ------------
Net income (loss) (Note 2) ........................ $12,056,531 $(1,176,228) $ (11,024,915) $ (1,296,737)
============ ============ ============= ============
Net income (loss) per weighted average share ...... $ 0.54 $ (0.08)
============ ============
Weighted average number of shares
outstanding .................................... 22,511,448 14,204,305
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-10
<PAGE>
PHYMATRIX CORP.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the year ended January 31, 1997, the month ended January 31, 1996,
the year ended December 31, 1995 and the period June 24 (inception)
to December 31, 1994
<TABLE>
<CAPTION>
Common Stock
Outstanding Retained
----------------------- Additional Earnings
Paid-In (Accumulated
Shares Amount Capital Deficit) Total
------------ ---------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Balances--June 24, 1994 .................. -- $ -- $ -- $ -- $ --
Capital Contribution ..................... -- -- 12,963,713 -- 12,963,713
Loss for the period June 24, 1994
(inception) to December 31, 1994 ......... -- -- -- (1,296,737) (1,296,737)
----------- --------- ------------ ------------- -------------
Balances--December 31, 1994 ............... -- -- 12,963,713 (1,296,737) 11,666,976
Capital Contribution ..................... -- -- 12,036,287 -- 12,036,287
Loss for the year ended
December 31, 1995 ........................ -- -- -- (11,024,915) (11,024,915)
----------- --------- ------------ ------------- -------------
Balanced--December 31, 1995 ............... -- -- 25,000,000 (12,321,652) 12,678,348
Initial Public Offering, net of costs ... 21,263,284 212,633 111,494,224 -- 111,706,857
Issuance of common stock for
acquisitions ........................... 266,666 2,667 3,997,333 -- 4,000,000
Loss for the month ended
January 31, 1996 ........................ -- -- -- (1,176,228) (1,176,228)
----------- --------- ------------ ------------- -------------
Balances--January 31, 1996 ............... 21,529,950 215,300 140,491,557 (13,497,880) 127,208,977
Adjustments for immaterial pooling
of interests ........................... 432,645 4,326 -- 778,960 783,286
Issuance costs ........................... -- -- (743,316) -- (743,316)
Issuance of common stock for
acquisitions ........................... 406,272 4,062 9,222,977 -- 9,227,039
Issuance of common stock pursuant
to stock plans . ........................ 52,166 522 358,288 -- 358,810
Net income for the year ended
January 31, 1997 ........................ -- -- -- 12,056,531 12,056,531
----------- --------- ------------ ------------- -------------
Balances--January 31, 1997 ............... 22,421,033 $224,210 $149,329,506 $ (662,389) $ 148,891,327
=========== ========= ============ ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-11
<PAGE>
PHYMATRIX CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Consolidated Consolidated Combined Combined
--------------- --------------- ------------------ ---------------
Period From
One Month June 24
Year Ended Ended Year Ended (Inception) to
January 31, January 31, December 31, December 31,
1997 1996 1995 1994
--------------- --------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .............................. $ 12,056,531 $ (1,176,228) $ (11,024,915) $ (1,296,737)
Noncash items included in net income (loss):
Depreciation and amortization ............... 7,144,588 535,300 3,862,519 107,387
Amortization of debt issuance costs ......... 276,625 -- -- --
Writedown of assets ........................ -- -- 1,554,607 --
Other ....................................... (650,940) 430,334 140,151 --
Changes in receivables ........................ (10,466,616) (739,635) (5,419,998) (389,442)
Changes in accounts payable and
accrued liabilities ........................... (4,160,458) (796,011) 8,221,039 242,612
Changes in other assets ........................ 1,559,269 (19,072) (1,425,016) 2,473
------------- ------------- -------------- -------------
Net cash provided (used) by
operating activities ..................... 5,758,999 (1,765,312) (4,091,613) (1,333,707)
------------- ------------- -------------- -------------
Cash flows from investing activities:
Capital expenditures ........................... (5,476,128) (184,460) (1,167,230) (107,348)
Sale of assets ................................. 1,243,762 24,794 -- --
Notes receivable .............................. (15,213,700) 686,400 (1,029,600) --
Repayments on notes receivable .................. -- -- 343,200 --
Purchase of investments in affiliates ......... -- -- (9,790,588) (2,661,511)
Other assets .................................... (1,440,176) -- (20,287) --
Acquisitions, net of cash acquired (Note 15) . (24,534,210) 54,252 (44,365,741) (8,183,902)
------------- ------------- -------------- -------------
Net cash provided (used) by
investing activities ..................... (45,420,452) 580,986 (56,030,246) (10,952,761)
------------- ------------- -------------- -------------
Cash flows from financing activities:
Capital contributions ........................... -- -- 12,036,287 12,963,713
Advances from (repayment to) shareholder ...... (15,523,287) (23,123,170) 36,690,180 --
Proceeds from issuance of common stock ......... 359,614 114,563,221 -- --
Proceeds from issuance of convertible
subordinated debentures ........................ 96,565,758 -- -- ---
Proceeds from issuance of debt .................. -- -- 19,143,127 --
Release of cash collateral ..................... 1,996,786 1,000,000 -- --
Cash collateralizing notes payable ............ -- (5,403,337) -- --
Offering costs and other ........................ (2,823,130) -- (1,030,632) --
Repayment of debt .............................. (7,134,228) (43,335,682) (3,797,435) --
------------- ------------- -------------- -------------
Net cash provided by
financing activities ..................... 73,441,513 43,701,032 63,041,527 12,963,713
------------- ------------- -------------- -------------
Increase in cash and cash equivalents ............ 33,780,060 42,516,706 2,919,668 677,245
Cash and cash equivalents, beginning of period ... 46,113,619 3,596,913 677,245 --
------------- ------------- -------------- -------------
Cash and cash equivalents, end of period ......... $ 79,893,679 $ 46,113,619 $ 3,596,913 $ 677,245
============= ============= ============== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-12
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Description of Business and Organization
PhyMatrix Corp. ("the Company") is a multi-specialty management company
that provides management services to the medical community. PhyMatrix also
develops medical malls, medical office buildings, and health parks, both for
its own account and for leading hospitals and health systems.
PhyMatrix Corp., formerly known as Continuum Care Corporation, was formed
to create a health care company which consummated an initial public offering
(the "offering") during January 1996 and simultaneously exchanged 13,040,784
shares of its common stock for all of the outstanding common stock of several
business entities (the "IPO entities") which were operated under common control
prior to the offering by Abraham D. Gosman, and with respect to DASCO
Development Corporation and affiliate (collectively, "DASCO"), by Mr. Gosman,
Bruce A. Rendina and Donald A. Sands (collectively Principal Shareholders of
the Company), since their respective dates of acquisition. Subsequent to the
offering, the Company changed its fiscal year end from December 31 to January
31 and financial statements as of and for the one month period ended January
31, 1996 are included herein.
Prior to the offering, each of the acquisitions of the business entities,
except where otherwise noted, was accounted for under the purchase method of
accounting and was recorded at the price paid by companies controlled by Mr.
Gosman when they purchased the entities from third parties. The audited
combined financial statements for the period June 24, 1994 (inception) through
December 31, 1994 and the year ended December 31, 1995 have been prepared to
reflect the combination of these business entities which have operated since
their purchase date under common control. Because certain of these entities
operated under common control were nontaxpaying (i.e., primarily S
corporations, which results in taxes being the responsibility of the respective
owners), the financial statements for the period June 24, 1994 (inception)
through December 31, 1994 and the year ended December 31, 1995 have been
presented on a pretax basis, as further described in Note 2.
The Company filed a Registration Statement on Form S-1 with the Securities
and Exchange Commission in connection with the offering which became effective
January 23, 1996. In connection with the offering, the Company issued 8,222,500
shares of Common stock. Net proceeds to the Company were $110,963,541, which
was net of underwriting discounts and commissions and offering expenses. The
Company used approximately $71,500,000 from the net proceeds of the offering to
repay certain indebtedness and obligations that arose from certain
acquisitions. The remaining net proceeds have and will continue to be used for
general corporate purposes, including future acquisitions and working capital.
During June 1996, the Company raised $100 million through the sale of its
63/4% Convertible Subordinated Debentures (the "Debentures") to certain
institutional investors and non-U.S. investors. The Debentures are convertible
into shares of the Company's Common Stock at a conversion price of $28.20 per
share, and are due in 2003. Net proceeds to the Company from the Debentures,
after deduction of the initial purchasers' discounts and commissions and
offering expenses, were $96,565,758. The Company used approximately $10,752,000
from the net proceeds of the Debenture offering to repay advances from the
principal shareholder. During July 1996, the Company filed a Registration
Statement on Form S-1 with the Securities and Exchange Commission to register
the resale of the Debentures by the holders thereof.
During July 1996, the Company also filed a Registration Statement on Form
S-4 with the Securities and Exchange Commission with respect to the
registration of an aggregate of up to 5,000,000 shares of Common Stock which
may be issued by the Company from time to time in connection with various
acquisitions that it may make.
F-13
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its 50% or greater owned subsidiaries. Significant intercompany accounts
and transactions have been eliminated in consolidation.
Estimates Used in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
are used when accounting for the collectibility of receivables and third party
settlements, depreciation and amortization, taxes and contingencies.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid instruments with
original maturities at the time of purchase of three months or less.
Revenue Recognition
Net revenue from services is reported at the estimated realizable amounts
from patients, third-party payors and others for services rendered. Revenue
under certain third-party payor agreements is subject to audit and retroactive
adjustments. Provisions for estimated third-party payor settlements and
adjustments are estimated in the period the related services are rendered and
adjusted in future periods as final settlements are determined. The provision
and related allowance are adjusted periodically, based upon an evaluation of
historical collection experience with specific payors for particular services,
anticipated reimbursement levels with specific payors for new services,
industry reimbursement trends, and other relevant factors.
Net revenues from management service agreements equals the net revenue
generated by the physician practices. Under the agreements, the Company is
responsible and at risk for the operating costs. The costs include the
reimbursement of all medical practice operating costs and payments to
physicians (which are reflected as cost of affiliated physician management
services).
Net revenues from medical facility development are recognized at the time
services are performed. In some cases fees are earned upon the achievement of
certain milestones in the development process, including the receipt of a
building permit and a certificate of occupancy of the building. Unearned
revenue relates to all fees received in advance of services being completed on
development projects.
Accounting Developments
The Emerging Issues Task Force (the "Task Force") of the Financial
Accounting Standards Board has added an agenda item to review various
accounting and reporting matters relating to the physician practice management
industry. Among other things, the Task Force plans to address the consolidation
of revenues of professional associations and accounting for business
combinations. Although the company believes that its accounting and reporting
practices are in conformity with generally accepted accounting principles and
common industry practice, there can be no assurance that the conclusions
reached by the Task Force will not have a material impact on the Company.
F-14
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Third Party Reimbursement
For the year ended January 31, 1997, the month ended January 31,1996, the
year ended December 31, 1995 and for the period from June 24, 1994 (inception)
to December 31, 1994, approximately 34%, 43%, 40% and 34%, respectively, of the
Company's net revenue was primarily from the participation of the Company's
home health care entities and physician practices in Medicare programs.
Medicare compensates the Company on a "cost reimbursement" basis for home
health care, meaning Medicare covers all reasonable costs incurred in providing
home health care. Medicare compensates the Company for physician services based
on predetermined fee schedules. In addition to extensive existing governmental
health care regulation, there are numerous initiatives at the federal and state
levels for comprehensive reforms affecting the payment for and availability of
health care services. Legislative changes to federal or state reimbursement
systems could adversely and retroactively affect recorded revenues.
Property and Equipment
Additions are recorded at cost and depreciation is recorded principally by
use of the straight-line method of depreciation for buildings, improvements and
equipment over their useful lives. Upon disposition, the cost and related
accumulated depreciation are removed from the accounts and any gain or loss is
included in income. Maintenance and repairs are charged to expense as incurred.
Major renewals or improvements are capitalized. Assets recorded under capital
leases are amortized over the shorter of their estimated useful lives or the
lease terms.
Income Taxes
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Deferred taxes arise
primarily from the recognition of revenues and expenses in different periods
for income tax and financial reporting purposes.
Prior to the offering, certain of the entities subsequently purchased by
the Company were S Corporations or partnerships; accordingly, income tax
liabilities were the responsibility of the respective owners or partners.
Provisions for income taxes and deferred assets and liabilities of the taxable
entities were not reflected in the combined financial statements prior to the
offering since there was no taxable income on a combined basis.
Goodwill
Goodwill relates to the excess of cost over the value of net assets of the
businesses acquired. Amortization is calculated on a straight line basis over
periods ranging from ten to 40 years. Accumulated amortization of goodwill was
$2,657,727, $959,210 and $840,928 at January 31, 1997, January 31, 1996 and
December 31, 1995, respectively.
Management Service Agreements
Management service agreements consist of the costs of purchasing the
rights to manage medical oncology and physician groups. These costs are
amortized over the initial noncancelable terms of the related management
service agreements ranging from ten to 40 years. Under the long-term
agreements, the medical groups have agreed to provide medical services on an
exclusive basis only through facilities managed by the Company. The agreements
are noncancelable except for performance defaults. In the event a medical group
breaches the agreement, or if the Company terminates with cause, the medical
group is required to purchase all related assets, including the unamortized
portion of any intangible assets, including management service agreements, at
the then net book value. Accumulated amortization of management service
agreements was $1,640,765, $315,336 and $254,741 at January 31, 1997, January
31,1996 and December 31, 1995.
F-15
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Debt Issuance Costs
Offering costs of approximately $3,434,242 related to the Debentures have
been deferred and are being amortized over the life of the Debentures.
Amortization expense of $276,625 has been included as interest expense in the
accompanying financial statements for the year ended January 31, 1997.
Long-Lived Assets
The Company periodically assesses the recoverability of long-lived assets,
including property and equipment and intangibles, when there are indications of
potential impairment, based on estimates of undiscounted future cash flows. The
amount of impairment is calculated by comparing anticipated discounted future
cash flows with the carrying value of the related asset. In performing this
analysis, management considers such factors as current results, trends and
future prospects, in addition to other economic factors.
Investments
The equity method of accounting is used for investments when there exists
a noncontrolling ownership interest in another company that is greater than
20%. Under the equity method of accounting, original investments are recorded
at cost and adjusted by the Company's share of earnings or losses of such
companies, net of distributions.
Net Income (Loss) Per Common Share
Net income (loss) per common share is calculated based on net income
(loss) divided by the weighted average number of common shares outstanding
during the year.
Stock Option Plans
On February 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation", which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income and pro
forma earnings per share disclosures for employee stock option grants made
during the year ended January 31, 1997 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
During 1997, the Financial Accounting Standards Board issued FASB
Statement No. 128, "Earnings Per Share". This standard is designed to improve
the Earnings Per Share ("EPS") information provided in financial statements by
simplifying the existing computational guidelines, revising the disclosure
requirements and increasing the comparability of EPS data on an international
basis. The Company will implement the new standard in its fiscal year ending
January 31, 1998. Management believes that the Company's adoption of this
Standard, when effective, will not have a significant impact on the Company's
financial statements.
Reclassifications
Certain prior year balances have been reclassified to conform with the
current year presentation.
3. Acquisitions
The following table sets forth the acquisitions completed by the Company
during the year ended January 31, 1997 with the respective purchase dates,
purchase prices and amounts allocated to intangibles. Each of the acquisitions
was accounted for under the purchase method of accounting, except where noted
otherwise.
F-16
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Amounts Allocated to Intangibles
--------------------------------
Date Purchase Management
Business Acquired Purchased Price Goodwill Service Contracts
- ----------------- --------- -------- ------------- ------------------
<S> <C> <C> <C> <C>
Employed physicians .................................... Various $ 3,213,399 $ 2,862,035 $ --
Managed Physician Practices:
[bullet] Atlanta Gastroenterology ..................... May 1996 6,100,000 -- --
[bullet] Oncology Care Associates ..................... May 1996 609,124 -- 609,124
[bullet] Busch ....................................... May 1996 787,864 -- 457,772
[bullet] Dal Yoo ....................................... June 1996 426,427 -- 291,874
[bullet] Koerner, Taub & Flaxman ..................... July 1996 948,610 -- 328,838
[bullet] Atlanta Metro Urology ........................ July 1996 755,163 -- 399,974
[bullet] Atlantic Pediatrics ........................... August 1996 412,539 -- 328,074
[bullet] Insignia Care for Women, P.A. ............... August 1996 3,439,331 -- 2,625,699
[bullet] Georgia Surgical Associates, P.C. ............ August 1996 1,548,756 -- 1,116,259
[bullet] Ankle & Foot Center of Tampa Bay, P.A. ...... August 1996 3,294,499 -- 3,161,192
[bullet] Boynton GI Group .............................. October 1996 1,341,521 -- 670,000
[bullet] Atlanta Specialists in Gastroenterology ...... January 1997 1,578,205 -- -
[bullet] American Regional Health Center ............... January 1997 6,029,272 -- 4,640,493
[bullet] Access Medical Care ........................... January 1997 4,500,652 -- 3,814,400
Medical Support Services:
[bullet] Outpatient Center of Boynton Beach, LTD . October 1996 4,755,255 -- 2,597,409
Management Services Organizations and
Contract Management:
[bullet] Physicians Choice Management, LLC ............ December 1995 12,148,822 12,099,111 --
[bullet] Central Georgia Medical Management, LLC April 1996 673,262 1,023,261 --
[bullet] New Jersey Medical Management, LLC ............ September 1996 454,168 541,668 --
[bullet] Physicians Consultant and Management Corporation September 1996 2,000,000 (A) 3,078,568 --
[bullet] New York Network Management, LLC ............ November 1996 1,258,861 2,661,800 --
</TABLE>
- ----------------
(A) In addition to the base purchase price, there is a contingent payment up to
a maximum of $10,000,000 based on the earnings before taxes during the
next five years.
Physician Practice Acquisitions/Mergers
During the year ended January 31, 1997, the Company purchased the assets
of and entered into employment agreements with Drs. Lawler, Cutler and
Surowitz. The total purchase price for these assets was $2,154,999 in cash and
$1,058,400 payable in Common Stock of the Company to be issued during the
second quarter of fiscal year 1998. The Common Stock to be issued is based upon
the average price of the stock during the five business days prior to the
issuance. The value of the Common Stock to be issued has been recorded in other
long term liabilities at January 31, 1997. The purchase price has been
allocated to the assets at their fair market value including goodwill of
$2,862,035. The resulting goodwill is being amortized over 20 years.
During May 1996, the Company purchased the stock of Atlanta
Gastroenterology Associates, P.C. pursuant to a tax free merger and entered
into a 40-year management agreement with the medical practice in exchange for
324,252 shares of Common Stock of the Company having a value of approximately
$6,100,000. The transaction has been accounted for using the
pooling-of-interests method of accounting.
F-17
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
During May 1996, the Company amended its existing management agreement
with Oncology Care Associates and extended the term of the agreement to 20
years. Simultaneously, the Company expanded the Oncology Care Associates
practice by adding three oncologists whose practices of whom the Company
acquired for $609,124. $309,124 of such purchase price was paid in cash and
$300,000 was paid in the form of a convertible note with a maturity in May
1997. The Company has the option to make such $300,000 payment at its
discretion in either cash or Common Stock of the Company with such number of
shares to be based upon the average price of the stock during the five business
days preceding such date. The purchase price has been allocated to the assets
at their fair market value, including management service agreements of
approximately $609,124. The resulting intangible is being amortized over 20
years.
During May and June 1996, the Company entered into agreements to purchase
the assets of and entered into 20-year management agreements with two physician
practices consisting of three physicians. These practices are located in South
Florida and Washington, D.C. The total purchase price for the assets of these
practices was $1,214,291. Of this amount, $663,667 was paid in cash and
$550,954 of such purchase price is payable in Common Stock of the Company to be
issued during May and June 1997. The number of shares of Common Stock of the
Company to be issued is based upon the average price of the stock during the
five business days prior to the issuance. The value of the Common Stock to be
issued has been recorded in other long term liabilities at January 31, 1997.
The purchase price has been allocated to the assets at their fair market value,
including management service agreements of $749,646. The resulting intangible
is being amortized over 20 years.
During July 1996, the Company purchased the assets of and entered into a
20-year management agreement with four physicians in Florida. The purchase
price for these assets was approximately $948,610, which was paid in cash. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $328,838. The resulting intangible
is being amortized over 20 years.
During July 1996, the Company purchased the assets of and entered into a
20-year management agreement with three urologists in Atlanta, Georgia. The
purchase price for these assets was $755,163. Of such purchase price, $475,163
was paid in cash and $280,000 is payable during July 1997 in Common Stock of
the Company with such number of shares to be based upon the average price of
the stock during the five business days prior to the issuance. The value of the
Common Stock to be issued has been recorded in other long term liabilities at
January 31, 1997. The purchase price has been allocated to these assets at
their fair market value, including management service agreements of
approximately $399,974. The resulting intangible is being amortized over 20
years.
During August 1996, the Company purchased the assets of and entered into a
management agreement with Atlantic Pediatrics. The purchase price for these
assets was $412,539. Simultaneous with the closing, Atlantic Pediatrics was
merged into Osler Medical, Inc. During the second quarter of 1996, the Company
also acquired certain copyright and trademark interests for a purchase price of
$887,000. The total purchase price for the assets acquired was allocated to
such assets at their fair market value, including management service agreements
of $1,215,074. The resulting intangible is being amortized over 20 years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with eight physicians in Florida. The purchase
price for these assets was $3,439,331. Of such purchase price, $1,519,331 was
paid in cash and $1,920,000 is payable during August 1997 in Common Stock of
the Company with such number of shares to be purchased based upon the average
price of the stock during the five business days prior to the issuance. The
value of the Common Stock to be issued has been recorded in other long term
liabilities at January 31, 1997. The purchase price has been allocated to these
assets at their fair market value, including management service agreements of
$2,625,699. The resulting intangible is being amortized over 40 years.
F-18
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with four physicians in Georgia. The purchase
price for these assets was $1,548,756. Of such purchase price, $855,956 was
paid in cash and $692,800 is payable during August 1997 in Common Stock of the
Company with such number of shares to be purchased based upon the average price
of the stock during the five business days prior to the issuance. The value of
the Common Stock to be issued has been recorded in other long term liabilities
at January 31, 1997. The purchase price has been allocated to these assets at
their fair market value, including management service agreements of $1,116,259.
The resulting intangible is being amortized over 40 years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with 10 physicians in Florida. The purchase price
for these assets was $3,294,499. Of such purchase price, $920,099 was paid in
cash and $2,374,400 is payable during August 1997 in Common Stock of the
Company with such number of shares to be purchased based upon the average price
of the stock during the five business days prior to the issuance. The value of
the Common Stock to be issued has been recorded in other long term liabilities
at January 31, 1997. The purchase price has been allocated to these assets at
their fair market value, including management service agreements of $3,161,192.
The resulting intangible is being amortized over 40 years.
During October 1996, the Company purchased the assets of and entered into
20-year management agreements with five physicians in Florida. The purchase
price for these assets was $1,341,521. Of such purchase price $806,521 was paid
in cash and $535,000 is payable during October 1997 in Common Stock of the
Company with such number of shares to be purchased based upon the average price
of the stock during the five business days prior to the issuance. The value of
the Common Stock to be issued has been recorded in other long term liabilities
at January 31, 1997. The purchase price has been allocated to these assets at
their fair market value, including management service agreements of $670,000.
The resulting intangible is being amortized over 20 years.
During January 1997, the Company purchased the stock of Atlanta
Specialists in Gastroenterology pursuant to a merger and entered into a 40-year
management agreement with the medical practice in exchange for 108,393 shares
of Common Stock of the Company having a value of approximately $1,578,205. The
transaction was accounted for using the pooling-of-interests method of
accounting.
During January 1997, the Company purchased the assets of and entered into
a 40-year management agreement with 14 physicians in Texas. The purchase price
for these assets was $6,029,272. Of such purchase price, $2,333,272 was paid in
cash and $3,696,000 is payable during January 1998 in Common Stock of the
Company with such number of shares to be purchased based upon the average price
of the stock during the five business days prior to the issuance. The value of
the Common Stock to be issued has been recorded in other long-term liabilities
at January 31, 1997. The purchase price has been allocated to these assets at
their fair market value, including management service agreements of $4,640,493.
The resulting intangible is being amortized over 40 years.
During January 1997, the Company purchased the assets of and entered into
a 40-year management agreement with 18 physicians in Florida. The purchase
price for these assets was $4,500,652. Of such purchase price, $2,273,613 was
paid in cash, $1,500,000 of bank debt was assumed and 42,830 shares of Common
Stock were issued having a value of $727,039. The purchase price has been
allocated to these assets at their fair market value, including management
service agreements of $3,814,400. The resulting intangible is being amortized
over 40 years.
Medical Support Service Companies Acquisition
During October 1996, the Company purchased the assets of an outpatient
ambulatory surgical center in Florida. The Company entered into a lease whereby
the surgical center was leased to a partnership with an initial term of 15
years. In addition, the Company entered into a 20-year management agreement
pursuant to which the Company receives a management fee which is based upon the
performance of the surgical center. The purchase price for these
F-19
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
assets was $3,531,630 plus the assumption of debt of $1,223,625 which consisted
of $717,557 in a mortgage payable and $506,068 in capital leases. The purchase
price has been allocated to the assets at their fair market value, including
management service agreements of $2,597,409. The resulting intangible is being
amortized over 20 years.
Management Services Organizations and Contract Management Acquisitions
During December 1995, the Company obtained a 43.75% interest in Physicians
Choice Management, LLC, an MSO that provides management services to an IPA
composed of over 375 physicians based in Connecticut. The Company acquired this
interest in exchange for a payment of $1.5 million to the MSO's shareholders
($1.0 million paid during 1995 and $.5 million paid during the second quarter
of 1996) and a capital contribution of $2.0 million to the MSO ($1.5 million
paid during 1995 and $.5 million paid during the second quarter of 1996). In
addition, upon the closing of the offering, the Company granted options to
purchase 300,000 shares of Common Stock to certain MSO employees in conjunction
with their employment agreements. These options vest over a two-year period
with the exercise price equaling the fair market value of the Company's stock
on the date such shares become exercisable. During September 1996, the Company
acquired the remaining 56.25% ownership interest in the MSO. The Company
acquired the remaining interests in exchange for a payment of $1,000,000 in
cash plus 363,442 shares of Common Stock of the Company. The Company also
committed to loan the MSO's selling shareholders $2,800,000 to pay the tax
liability related to the sale. As of January 31, 1997 $2,253,000 of the loan
amount committed had been advanced to the selling shareholders by the Company.
The total purchase price for the 100% interest was approximately $12,148,822
and has been allocated to these assets at their fair market value including
goodwill of $12,099,111. The resulting intangible is being amortized over 40
years.
During April 1996, the Company purchased a 50% interest in Central Georgia
Medical Management, LLC, an MSO that provides management services to an IPA
composed of 45 physicians based in Georgia. The Company acquired this interest
in exchange for a payment of $550,000 to existing shareholders and a capital
contribution of $700,000 to the MSO. The Company's balance sheet as of January
31, 1997 includes the 50% interest not owned by the Company as minority
interest. The owners of the other 50% interest in the MSO have a put option to
the Company to purchase their interests. This put option vests over a four year
period. The price to the Company to purchase these interests equals 40% of the
MSO's net operating income as of the most recent fiscal year multiplied by the
price earnings ratio of the Company. The minimum price earnings ratio used in
such calculation will be 4 and the maximum 10.
During September 1996, the Company purchased an 80% interest in New Jersey
Medical Management, LLC, an MSO that provides management services to an IPA
with more than 450 physicians in New Jersey. The Company acquired this interest
in exchange for a payment of $350,000 to existing shareholders. The Company's
balance sheet at January 31, 1997 includes the 20% interest not owned by the
Company as minority interest.
During September 1996, the Company purchased the stock of Physicians
Consultant and Management Corporation ("PCMC"), a company based in Florida that
provides the managed health care industry with assistance in provider
relations, utilization review and quality assurance. The base purchase price
for the stock was $2,000,000 with $1,000,000 paid on the closing date and
$1,000,000 paid during February 1997. There is also a contingent payment up to
a maximum of $10,000,000 based on PCMC's earnings before taxes during the next
five years which will be paid in cash and/or Common Stock of the Company. The
purchase price has been allocated to the assets at their fair market value
including goodwill of approximately $3,078,568. The resulting intangible is
being amortized over 30 years.
During November 1996, the Company established New York Network Management,
L.L.C. ("Network"), which is 51% owned by the Company, to purchase the assets
and stock of various entities which comprise Brooklyn Medical Systems ("BMS").
BMS arranges for the delivery of health care services to members through
affiliations
F-20
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
with more than 600 physicians in the New York City area. The base purchase
price for Network was $1,200,000 and an additional payment not exceeding
$1,000,000 may be required to be made during the next three years if certain
pre-tax earnings thresholds are achieved. The Company has committed to fund
approximately $2,400,000 to Network during the next three years. Such advances
can be in the form of a demand loan or for additional ownership interests if
the other owners do not elect to contribute their pro-rata share of any
additional capital contribution ($100,000 of additional capital contribution
for an additional 1% interest) in Network. During the first three years the
Company has the option to purchase up to an additional 29% ownership interest.
During years four and five the owners of 29% of Network have the right to
require the Company to purchase their interests at the option price.
Year Ended December 31, 1995
Physician Practice Acquisitions
During the year ended December 31, 1995, the Company purchased the assets
of several physician practices and in conjunction with those purchases entered
into employment agreements with 14 physicians in Florida. The total purchase
price for these assets was $4,158,875. The purchase price was allocated to
these assets at their fair market value, including goodwill of $3,093,946. The
resulting goodwill is being amortized over 20 years.
During the year ended December 31, 1995, the Company purchased the assets
of and entered into management service agreements with Oncology-Hematology
Associates, P.A. and Oncology-Hematology Infusion Therapy, Inc.; Georgia Cancer
Specialists, Inc.; Osler Medical, Inc.; Oncology Radiation Associates, P.A.;
West Shore Urology; Whittle, Varnell and Bedoya, P.A.; Oncology Care
Associates; Venkat Mani; and Symington, consisting of an aggregate of 79
physicians including 45 oncologists. The total purchase price for these assets
was $23,425,190 in cash. In connection with these acquisitions, the Company
also entered into a 15-year capital lease with a total obligation of $1,569,171
and assumed debt of $6,893,609. The purchase price for the practices' assets
was allocated to assets at their fair market value, including management
service agreements of $18,814,763. The resulting intangible is being amortized
over the life of the management agreements which range from ten to 20 years.
Medical Support Service Companies Acquisitions
During March 1995, the Company acquired by merger all of the outstanding
shares of stock of Oncology Therapies, Inc. (formerly known as Radiation Care,
Inc. and referred to herein as "OTI") for $2.625 per share. OTI owns and
operates outpatient radiation therapy centers utilized in the treatment of
cancer and diagnostic imaging centers. The total purchase price for the stock
(not including transaction costs and 26,800 shares initially subject to
appraisal rights) was approximately $41,470,207. During April 1995, the Company
purchased from Aegis Health Systems, Inc. for $7,163,126 all of the assets used
in its lithotripsy services business. During November 1995 the Company acquired
by merger Pinnacle Associates, Inc. ("Pinnacle"), an Atlanta, Georgia infusion
therapy services company. In connection with the Pinnacle merger there is a
$5,200,000 maximum payment that may be required to be paid that is based on
earnings and will be made in the form of shares of Common Stock of the Company
valued as of the earnings measurement date. The contingent consideration
represents the full purchase price. The purchase price for these acquisitions
was allocated to assets at their fair market value including goodwill of
$19,235,818. The resulting intangibles are being amortized over 20 to 40 years.
Medical Facility Development Acquisition
On May 31, 1995, Mr. Gosman, Chairman of the Board and Chief Executive
Officer of the Company purchased a 50% ownership interest in DASCO Development
Corporation and DASCO Development West, Inc. (collectively, "DASCO"), a medical
facility development services company providing such services to related and
unrelated third
F-21
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
parties in connection with the development of medical malls, health parks and
medical office buildings. The purchase price consisted of $5.2 million in cash
and $4.6 million in notes, which were guaranteed by Mr. Gosman. Upon the
closing of the Company's initial public offering, Messrs. Gosman, Sands and
Rendina, the Company's principal promoters, and certain management and founder
stockholders exchanged their ownership interests in DASCO for shares of Common
Stock equal to a total of $55 million or 3,666,667 shares. The Company believes
that its medical facility development services and project finance strategy are
a significant component of the Company's overall business strategy. The
historical book value of Messrs. Sands and Rendina's interest in DASCO is
$22,735. The initial 50% purchase price was allocated to assets at their fair
market value, primarily goodwill of $9.8 million with the exchange recorded at
historical value. At December 31, 1995, the acquisition of the 50% interest in
DASCO was being accounted for using the equity method.
Period June 24, 1994 (inception) to December 31, 1994 Acquisitions
Medical Support Service Companies Acquisitions During September 1994, an
80% owned subsidiary of the Company purchased substantially all of the assets
of Uromed Technologies, Inc. ("Uromed"), a provider of lithotripsy services in
Florida, for a purchase price of $3,141,535 plus the assumption of capital
lease obligations of $1,097,614. The Company intends to acquire the outstanding
20% interest in the subsidiary. During November 1994, the Company purchased 80%
of the stock of Nutrichem, Inc. ("Nutrichem"), an infusion therapy company
doing business in Maryland, Virginia and the District of Columbia, for
$3,528,704 in cash and a contingent note in the amount of $6,666,667, subject
to adjustments. A charge of $1,271,000 related to this contingent note was
recorded during the year ended December 31, 1995. The remaining $5,395,667 was
allocated to goodwill at December 31, 1995 and is being amortized. Subsequent
to the offering, the Company acquired the outstanding 20% interest in Nutrichem
in exchange for 266,666 shares of Common Stock resulting in additional purchase
price of $4,000,000. During November 1994, the Company acquired all of the
assets and assumed certain liabilities of First Choice Health Care Services of
Ft. Lauderdale, Inc., First Choice Health Care Services, Inc. and First Choice
Home Care Services of Boca Raton, Inc., home health care companies doing
business in Florida, for a total purchase price of $2,910,546 in cash plus the
assumption of $225,000 in debt. The purchase price for these acquisitions was
allocated to assets at their fair market value, including goodwill of
$14,818,145. The resulting intangibles are being amortized over 20 to 40 years.
During December 1994, the Company purchased a 36.8% partnership interest
in Mobile Lithotripter of Indiana Partners, a provider of lithotripsy services
in Indiana, from Mobile Lithotripter of Indiana, Limited, for $2,663,000 in
cash. This investment is being accounted for by the equity method.
The accompanying financial statements include the results of operations
derived from the entities purchased by the Company since the date of
acquisition. The following unaudited pro forma information presents the results
of operations of the Company for the years ended January 31, 1997 and December
31, 1995 as if the acquisition of the entities purchased to date had been
consummated on February 1, 1996 and January 1, 1995. Such unaudited pro forma
information is based on the historical financial information of the entities
that have been purchased and does not include operational or other changes
which might have been effected pursuant to the Company's management. The
unaudited pro forma information also gives effect to both the Company's January
1996 initial public offering and the Convertible Subordinated Debenture
Offering and the application of the net proceeds therefrom, as if such
transactions had occurred on January 1,1995.
The unaudited pro forma information presented below is for illustrative
informational purposes only and is not necessarily indicative of results which
would have been achieved or results which may be achieved in the future (in
thousands except per share amounts):
F-22
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Pro Forma
-------------------------------------
January 31, 1997 December 31, 1995
------------------ ------------------
(unaudited)
<S> <C> <C>
Revenue .......................................... $ 227,065 $ 180,271
Net income (loss) ................................. 11,081 (323)
Net income (loss) per share ..................... $ 0.47 $ (0.01)
========== =========
Number of shares used in pro forma net income (loss)
per share calculation ........................... 23,455 23,455
========== =========
</TABLE>
4. Notes Receivable
During April 1995, the Company funded a tax loan in the amount of
$1,029,600 at an interest rate of 7.75% to the former shareholders of Nutrichem
which was paid in full in January 1996.
During 1996, the Company loaned $10,000,000 to an unrelated healthcare
entity. The principal and interest are due in one installment on August 15,
1997. Interest on the loan accrues at the rate of prime plus 2%.
During 1996, the Company loaned $2,253,000 to the shareholders of
Physicians Choice, LLC pursuant to the agreement under which the Company
purchased the remaining ownership interests in Physicians Choice Management,
LLC (see Note 3). The note has a variable rate of interest and a final maturity
in April 2004.
During 1996, the Company loaned an aggregate of $2,685,700 to various
entities. The notes bear interest at rates ranging from the prime rate to the
prime rate plus 1% and have final maturities ranging from November 2001 to
October 2011. The notes are revolving loan agreements with a total commitment
of $3,750,000.
5. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
January 31, December 31,
Estimated --------------------------------- -------------
Useful Life
(Years) 1997 1996 1995
------------ --------------- --------------- -------------
<S> <C> <C> <C> <C>
Land .............................. -- $ 2,714,948 -- --
Building ........................... 15-20 1,569,170 $ 7,852,653 $ 7,852,653
Furniture and fixtures ............ 5-7 10,107,182 5,448,394 5,312,385
Equipment ........................... 7-10 23,704,983 21,350,946 21,789,876
Automobiles ........................ 3-5 128,168 43,977 50,058
Computer software .................. 5 981,696 948,056 950,346
Leasehold improvements ............ 4-20 6,823,262 6,047,403 6,045,393
------------ ------------ ------------
Property and equipment, gross ...... 46,029,409 41,691,429 42,000,711
Less accumulated depreciation ...... (7,362,886) (2,972,343) (2,641,383)
------------ ------------ ------------
Property and equipment, net ......... $ 38,666,523 $ 38,719,086 $ 39,359,328
============ ============ ============
</TABLE>
Depreciation expense was $4,094,131, $355,584, $2,761,000 and $70,240,
respectively, for the year ended January 31, 1997, the month ended January 31,
1996, the year ended December 31, 1995 and the period June 24, 1994 (inception)
to December 31, 1994.
Included in property and equipment at January 31, 1997, January 31, 1996
and December 31, 1995 are assets under capital leases of $3,520,819, $8,629,133
and $9,483,145, respectively, with accumulated depreciation of $987,070,
$554,536 and $842,879, respectively.
F-23
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
6. Investment in Affiliates
On December 31, 1994, the Company purchased a 36.8% interest in Mobile
Lithotripter of Indiana Partners, for $2,663,000. During August 1995, the
Company purchased a 46% interest in I Systems, Inc., for $180,000. I Systems,
Inc. is engaged in the business of claims processing and related services. The
Company has the option to purchase up to an additional 30% interest in I
Systems for $33,333 in cash for each additional one percent of ownership
interest purchased. During the year ended January 31, 1997, the Company
increased its ownership interest in I Systems by two percent. These investments
are being accounted for using the equity method at January 31, 1997. During
May, 1995, Mr. Gosman purchased a 50% interest in DASCO, a medical facility
development services company, for $9,610,000. Upon the completion of the
offering, the remaining 50% interest in DASCO was purchased and DASCO has been
consolidated subsequent to the offering.
7. Accrued and Other Current Liabilities
Accrued and other current liabilities consist of the following:
<TABLE>
<CAPTION>
January 31,
----------------------------- December 31,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Accrued closure costs .............................. $ 570,000 $ 570,000 $ 570,000
Accrued rent ....................................... 1,141,618 810,062 799,551
Accrued income taxes .............................. 1,991,368 -- --
Accrued professional fees ........................... 4,502,263 438,825 445,250
Accrued additional purchase price .................. 1,000,000 -- --
Accrued offering costs .............................. -- 1,825,732 885,770
Accrued interest .................................... 991,977 381,894 738,317
Accrued bonus payments .............................. -- 274,120 4,718,564
Unearned revenue .................................... 331,445 -- --
Other ............................................. 916,269 1,893,475 1,210,080
------------ ------------ -----------
Total accrued and other current liabilities ...... $11,444,940 $ 6,194,108 $9,367,532
============ ============ ===========
</TABLE>
The accrued closure costs are primarily for the remaining lease obligation
for the closure of five radiation therapy centers acquired when the Company
purchased OTI during March 1995. $1,074,013 of accrued closure costs is
classified as a long-term liability at January 31, 1997. Closure costs in the
amount of $3,134,028 were accrued at December 31, 1995. $2,188,635 of such
accrual was recorded as an adjustment to the purchase price and $945,393 of
such accrual was recorded as a charge in 1995. In addition, the Company also
recorded a charge of $1,554,607 during 1995 which represented the writedown of
assets to their estimated fair market value.
F-24
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
8. Long-term Debt, Notes Payable and Capital Leases
Long-term debt, notes payable and capital leases consist of the following:
<TABLE>
<CAPTION>
January 31,
----------------------------
1997 1996 December 31, 1995
--------------- ---------- ------------------
<S> <C> <C> <C>
Convertible subordinated debentures, with an interest
rate of 6.75% and a maturity of June 15, 2003 ...... $ 100,000,000 $ -- $ --
Note payable due to four individuals payable in eight
equal semi-annual installments of $28,125,
including interest at 8% through November 1998 ...... 84,375 140,625 140,625
Notes payable to a bank, with a maturity date of
December 2001 and an interest rate of 8.25% ......... 85,111 -- --
Note payable to an individual, payable on demand
including interest at 9% ........................... 6,762 -- --
Related party note payable due to three individuals
payable on demand including interest at 10%. One
of the notes for $30,000 is collateralized by the
cash and accounts receivable of Pinnacle ............ -- 130,000 130,000
Note payable to a bank interest payable monthly at
the prime rate plus 2% (10.50% at January 31,
1996) with a maturity date of April 1996 ............ -- 201,422 201,422
Line of credit note payable to a bank, due and
payable on demand, interest at the prime rate
(8.50% at January 31, 1996) ........................ -- 400,000 400,000
Note payable to a bank, collateralized by the assets
of a multi-specialty group practice, payable in
monthly installments of $14,027, including interest
at 7.50% and a final payment in February 1999 ...... 322,675 461,105 472,181
Note payable to a bank, collateralized by the assets
of a multi-specialty group practice, payable in
monthly installments of $20,608, at 8.75% and a
final payment in August 2000 ........................ 758,335 895,075 918,779
Convertible note payable to the former shareholders
of a medical practice in Pennsylvania, with a
maturity date of May 1997 and an interest rate of
9%. The Company has the option to make such
payment in either cash or Common Stock of the
Company (see Note 3) .............................. 300,000 -- --
Mortgage note payable to a bank, collateralized by
the assets of an outpatient surgery center, payable
in monthly installments of $6,627.69 including
interest at 8.86% and a final maturity of
November 2001 ....................................... 712,836 -- --
</TABLE>
F-25
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
January 31,
--------------------------------
1997 1996 December 31, 1995
-------------- --------------- ------------------
<S> <C> <C> <C>
Note payable to a bank, payable in monthly
installments, interest at the prime rate plus .375%
and a final maturity of June 1998 ..................... 1,475,000 -- --
Note payable in two equal installments in April 1996
and 1997 (or earlier upon a reorganization which
includes an initial public offering), including
interest at 8% .......................................... -- -- 3,567,408
Related party notes payable to the shareholders of
DASCO, payable in May 1996, including interest
at 6.37% ................................................ -- 4,610,588 4,610,588
Note payable to the former shareholders of a medical
oncology practice in South Florida, payable in ten
equal semi-annual installments of $682,867, which
includes interest at 9%. The note payable is
collateralized by an irrevocable letter of credit ...... 4,504,184 5,403,337 5,403,337
Note payable to a financing institution with a
maturity date of March 2000, a final payment of
$2,187,500, and an interest rate at the prime rate
plus 3% (11.50% at December 31, 1995) .................. -- -- 15,743,466
Note payable to NationsBank, with a maturity date
of June 1996 and an interest rate at the prime rate
plus .375% (8.875% at December 31, 1995). This
note payable was personally guaranteed by
Mr. Gosman ............................................. -- -- 19,500,000
Note payable to Mr. Gosman with a maturity date of
January 1998 and an interest rate at the prime rate
(8.50% at December 31, 1995) ........................... -- 10,147,287 36,690,180
Capital lease obligations with maturity dates through
September 2015 and interest rates ranging from
8.75% to 12% .......................................... 3,173,172 8,704,179 9,163,215
------------ ------------ -------------
111,422,450 31,093,618 96,941,201
Less current portion of capital leases .................. (842,445) (357,791) (756,767)
Less current portion of debt ........................... (2,903,055) (2,194,515) (25,905,743)
Less current portion of related party debt ............... -- (4,740,588) (4,740,588)
------------ ------------ -------------
Long term debt and capital leases ........................ $107,676,950 $ 23,800,724 $ 65,538,103
============ ============ =============
</TABLE>
F-26
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
The following is a schedule of future minimum principal payments of the
Company's long-term debt and the present value of the minimum lease commitments
at January 31, 1997:
<TABLE>
<CAPTION>
Capital
Debt Leases
-------------- ---------------
<S> <C> <C>
Through January 31, 1998 .................................... $ 2,903,055 $ 1,145,616
Through January 31, 1999 .................................... 1,852,954 686,960
Through January 31, 2000 .................................... 1,414,624 429,075
Through January 31, 2001 .................................... 1,439,971 388,477
Through January 31, 2002 .................................... 638,675 253,490
Thereafter ................................................... 100,000,000 1,861,894
------------ ------------
Total ...................................................... 108,249,279 4,765,512
Less amounts representing interest and executory costs ...... -- (1,592,340)
------------ ------------
Present value of minimum lease payments ..................... 108,249,279 3,173,172
Less current portion ....................................... (2,903,055) (842,445)
------------ ------------
Long term portion .......................................... $105,346,224 $ 2,330,727
============ ============
</TABLE>
9. Lease Commitments
The Company leases various office space and certain equipment pursuant to
operating lease agreements.
Future minimum lease commitments consisted of the following at January 31:
1998 ............ $ 9,494,771
1999 ............ 6,816,351
2000 ............ 5,940,868
2001 ............ 3,567,224
2002 ............ 2,766,111
Thereafter ...... 5,513,463
------------
$34,098,788
============
10. Commitments and Contingencies
The Company is subject to legal proceedings in the ordinary course of its
business. While the Company cannot estimate the ultimate settlements, if any,
it does not believe that any such legal proceedings will have a material
adverse effect on the Company, its liquidity, financial position or results of
operations, although there can be no assurance to this effect.
The Company has entered into employment agreements with certain of its
employees, which include, among other terms, noncompetition provisions and
salary and benefits continuation.
The Company has committed to expend up to $1,500,000 per year for each of
three years to assist in the expansion activities of Osler Medical, Inc., a
22-physician multi-specialty group practice it entered into a management
agreement with in September 1995.
During 1996, the Company purchased the stock of a company based in Florida
that provides the managed health care industry with assistance in provider
relations, utilization review and quality assurance. In conjunction with this
acquisition, the Company may be required to make a contingent payment up to a
maximum of $10 million
F-27
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
based on the acquired company's earnings before taxes during the next five
years. The payment, if required, shall be paid in cash and/or Common Stock of
the Company.
In conjunction with the acquisition of Physicians Choice Management, LLC,
the Company has committed to loan the selling shareholders $2.8 million to pay
the tax liability related to the sale. As of January 31, 1997, $2.3 million of
the loan amount committed had been advanced to the selling shareholders by the
Company.
During the year ended January 31, 1997 the Company loaned an aggregate of
$2,685,700 to various entities. The notes are revolving loan agreements with a
total commitment of $3,750,000.
In conjunction with certain of its acquisitions, the Company has agreed to
make payments in shares of Common Stock of the Company which are generally
issued one year from the closing date of such acquisitions with the number of
shares generally determined based upon the average price of the stock during
the five business days prior to the date of issuance. As of January 31, 1997
the Company had committed to issue $11.1 million of Common Stock of the Company
using the methodology discussed above.
A subsidiary of the Company, OTI, (formerly Radiation Care, Inc., "RCI")
is subject to the litigation described below which related to events prior to
the Company's operation of RCI, and the Company has agreed to indemnify and
defend certain defendants in the litigation who were former directors and
officers of RCI subject to certain conditions. The Company has accrued the
estimated costs to defend and settle this litigation in purchase accounting.
In December, 1994, prior to its merger with the Company in March 1995, RCI
entered into a settlement agreement with the federal government arising out of
claims under the fraud-and-abuse provisions of the Medicare law. Under the
settlement agreement, RCI, without admitting that it violated the law,
consented to a civil judgment providing for its payment of $2 million and the
entry of an injunction against violations of such provisions.
On February 16, 1995, six former stockholders of RCI filed a consolidated
amended Class Action Complaint in Delaware Chancery Court (In re Radiation
Care, Inc. Shareholders Litigation, Consolidated C.A. No. 13805) against RCI,
Thomas Haire, Gerald King, Charles McKay, Abraham Gosman, Oncology Therapies of
America, Inc. ("OTA") and A.M.A. Financial Corporation, ("AMA") alleging that
the RCI stockholders should have received greater consideration for their RCI
stock when RCI was merged with the Company. Plaintiffs allege breaches of
fiduciary duty by the former RCI directors, as well as aiding and abetting of
such fiduciary duty breaches by Mr. Gosman, OTA and AMA. Plaintiffs seek
compensatory or rescissionary damages of an undisclosed amount on behalf of all
RCI stockholders, together with an award of the costs and attorneys' fees
associated with the action. No class has been certified in this litigation. On
May 17, 1996, the Company filed an Answer denying any liability of any
defendant in connection with this litigation. All discovery in the Delaware
action, except for expert and class certification related discovery, is now
complete. On January 10, 1997, the Company filed a Motion for Summary Judgment
seeking dismissal of all plaintiffs' claims. Plaintiffs' Opposition to that
motion is due in late April, and the Company intends to file a Reply brief in
May. No hearing on the Motion has been scheduled yet by the Court. The Company
intends to continue to defend the case vigorously.
On August 4, 1995, 26 former stockholders of RCI filed a Complaint for
Money Damages against Richard D'Amico, Ted Crowley, Thomas Haire, Gerald King,
Charles McKay and Randy Walker (all former RCI officers and/or directors) in
the Superior Court of Fulton County, in the State of Georgia (Southeastern
Capital Resources, L.L.C. et al. v. Richard D'Amico et al., Civil Action No.
E41225). Early on in the litigation two of the plaintiffs withdrew from the
litigation, and during the deposition phase of the case, two more plaintiffs
dropped out. However, plaintiffs added four additional plaintiffs with the
filing of an Amended Complaint on November 27, 1995. Plaintiffs allege a breach
of fiduciary duty by the former RCI directors Haire, King and McKay, a
conspiracy by the RCI officer defendants D'Amico, Crowley and Walker, and
negligence by all defendants. Plaintiffs seek additional consideration for
their shares of RCI common stock in the form of compensatory and monetary
damages in the
F-28
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
amount of $5.7 million, plus punitive damages, interest, costs and attorneys
fees. On September 22, 1995, the defendants filed an Answer denying any
liability in connection with this litigation. On October 23, 1995, the
defendants filed a motion to stay the action pending resolution of the Delaware
class action. The Court denied the Motion on April 16, 1996. All discovery in
the case was completed as of September 13, 1996. The Defendants moved for
summary judgment on September 20, 1996. The plaintiffs filed an opposition on
November 18, 1996. Defendants filed a Reply brief on February 27, 1997. The
Court has not yet scheduled a hearing on the Motion, but one should be
scheduled soon. The Court indicated at a Status Conference on January 14, 1997
that the case would be placed on a trial list in March 1997 but that the case
would be near the bottom of that list, and not likely to be reached for trial
until later this year. On April 17, 1997 the Court published a two-week trial
list for May 13, 1997 on which this case appears at number 18. The Company is
not a party to this litigation and its exposure is limited to its obligation
under its by-laws to indemnify the former officers and directors of RCI to the
fullest extent permitted by Delaware law. The Company intends to continue to
vigorously defend against this litigation.
11. Related Party Transactions
For the year ended December 31, 1995 and the period June 24, 1994
(inception) to December 31, 1994, Continuum Care of Massachusetts, Inc., whose
principal shareholder is Mr. Gosman, provided management services to the
Company. Fees for these services in the amount of $3,729,680 and $1,629,753,
respectively, have been included in the financial statements and consist of the
following:
December 31,
--------------------------
1995 1994
------------ -----------
Salaries, wages and benefits ...... $2,267,891 $ 934,200
Professional fees .................. 273,941 253,955
Rent .............................. 459,732 192,242
Other .............................. 728,116 249,316
----------- -----------
$3,729,680 $1,629,713
=========== ===========
Such fees were based on the discretion of Continuum Care of Massachusetts,
Inc., and may not have been indicative of what they would have been if the
Company had performed these services internally or had contracted for such
services with unaffiliated entities. Included in rent was rent expense of
approximately $415,000 and $156,000 for the year ended December 31, 1995 and
the period June 24, 1994 (inception) to December 31, 1994, respectively, for
the Company's principal office space in West Palm Beach, Florida. The lessee of
the office space prior to the offering was Continuum Care of Massachusetts,
Inc.. The current lease term expires January 31, 2000.
The Company assumed the lease from Continuum Care of Massachusetts, Inc.
upon the consummation of the offering.
In connection with the purchase of Nutrichem during November 1994, the
Company was required to make contingent note payments in the amount of
$4,444,444 which had been accrued at December 31, 1995. Payments on the
contingent note are based on attaining certain earnings thresholds. A charge of
$1,271,000 related to this contingent note was recorded during 1995. The
$4,444,444 which had been accrued represented the maximum remaining amount
because the earnings threshold upon which the payment is based was reached
during 1995. The contingent note was personally guaranteed by Mr. Gosman. The
contingent note was paid in full during January 1996 with the proceeds from the
offering.
During March 1995, the Company incurred a $17,500,000 note payable to a
financing institution in connection with the purchase of OTI. Mr. Gosman
personally guaranteed a portion of the $17,500,000. Mr. Gosman's liability
F-29
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
under the guarantee was limited to no more than $6,125,000. The note was paid
in full during January 1996 with the proceeds from the offering.
During May 1995, Mr. Gosman incurred $4,610,588 of debt payable, which has
been included in these financial statements, to the shareholders of DASCO in
connection with the purchase of 50% of the outstanding stock of DASCO. The
notes bear interest at 6.37% per annum and were repaid during 1996.
Meditrust, a publicly traded real estate investment trust with assets in
excess of $2.4 billion of which Mr. Gosman is the Chairman of the Board and
Chief Executive Officer, has provided construction financing to customers of
DASCO in the aggregate amount of $176,000,000 for 19 facilities developed by
DASCO.
DASCO provides development and other services in connection with the
establishment of health parks, medical malls and medical office buildings.
DASCO provides these services to or for the benefit of the owners of the new
facilities, which owners are either corporations or limited partnerships. Mr.
Sands and Mr. Rendina have obtained equity interests in the entities which own
26 of the 29 facilities developed by DASCO. The collective interests of Messrs.
Sands and Rendina range from 17% to 100%. In addition, Mr. Gosman individually
and as trustee for his two sons and Frederick R. Leathers, Robert A. Miller,
William A. Sanger and Edward E. Goldman have obtained limited partnership
interests ranging from 14% to 36% in the entities which own 11 facilities being
developed by the Company through DASCO. During the year ended January 31, 1997,
DASCO recorded revenues in the amount of $9,986,790 related to facilities
developed by DASCO in which equity interests have been obtained by related
parties.
The Company provides construction management, development marketing and
consulting services to entities principally owned by Mr. Gosman in connection
with the development and operation by such entities of several medical
facilities. During the year ended January 31, 1997, the Company recorded
revenues in the amount of $7,047,611 related to such services. The Company
provides these services to affiliated parties on terms no less favorable to the
Company than those provided to unaffiliated parties.
The Company was required to assume an unfavorable lease in one of its
acquisitions. The Company planned to dispose of the lease and accrued $559,000
in purchase accounting which represents the difference between the unfavorable
lease costs and the estimated fair market value rent. The Company assigned the
lease in January 1997 to an entity principally owned by Mr. Gosman.
At December 31, 1995, the Company had borrowed $36,690,180 from Mr.
Gosman. Interest on such outstanding indebtedness at the prime rate of interest
during the year ended December 31, 1995 was $1,708,174. During January 1996,
the Company repaid Mr. Gosman $28,676,743 of such advances with the proceeds of
the offering.
During July 1995, the Company purchased the assets of and entered into a
15-year management agreement with a medical oncology practice with three
medical oncologists. An affiliate of the Company, Continuum Care of
Massachusetts, Inc., guarantees the performance of the Company's obligations
under the management agreement.
During September 1995, the Company provided a letter of credit in the
amount of $5,403,337 to a seller in connection with entering into a management
agreement and purchasing the assets of a medical oncology practice. Cash
collateralizing the letter of credit, which has a balance of $4,504,184 at
January 31, 1997, is included in other long term assets on the balance sheet.
Prior to the completion of the offering, the collateral for the letter of
credit was provided by Mr. Gosman.
During September 1995, the Company refinanced $19,500,000 of an amount
owed to Mr. Gosman with NationsBank. The $19,500,000 amount refinanced with
NationsBank and outstanding at December 31, 1995 was
F-30
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
personally guaranteed by Mr. Gosman. The $19,500,000 was paid in full during
January 1996 with the proceeds of the offering.
During November 1995, the Company assumed $180,000 of notes payable to
four former shareholders of Pinnacle when the Company merged with Pinnacle. One
of these notes for $50,000 was repaid during December 1995 and the remainder
were repaid during 1996.
12. Disclosures about Fair Value of Financial Instruments
The methods and assumptions used to estimate the fair value of each class
of financial instruments, for which it is practicable to estimate that value,
and the estimated fair values of the financial instruments are as follows:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short effective
maturity of these instruments.
Long-term Debt
The fair value of the Company's long-term debt and capital leases is
estimated based on the quoted market prices for the same or similar issues or
on the current rates offered to the Company for debt of the same remaining
maturities. The carrying amount and fair value of long-term debt and capital
leases, including current maturities and related party debt, at January 31,
1997, January 31, 1996 and December 31, 1995 is $111,422,450, $31,093,618 and
$96,941,201, respectively.
13. Employee Benefit Plan
The Company sponsors a 401(k) plan, covering substantially all of its
employees. Contributions under the 401(k) plan equal 50% of the participants'
contributions up to a maximum of $400 per participant per year.
14. Income Taxes
The financial statements of the Company for the periods prior to the
offering do not include a provision for income taxes because the taxable income
of the various entities that comprise the Company were either included in the
tax return of the Partnership's partners and former Subchapter S corporation's
shareholders, or the entities generated significant losses.
The Company became subject to federal and state income taxes effective the
date of the Company's initial public offering. Significant components of the
Company's provision for income taxes for the year ended January 31, 1997 and
the one month period ended January 31, 1996 are as follows:
1997 1996
------------ -------
Federal:
Current ............... $4,305,329 --
Deferred ............ 1,084,693 --
----------- -------
Total federal ...... 5,390,022 --
----------- -------
State:
Current ............... 1,176,555 --
Deferred ............ 269,489 --
----------- -------
Total state ......... 1,446,044 --
----------- -------
Totals ............... $6,836,066 --
=========== =======
F-31
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Significant components of the Company's deferred tax assets and
liabilities as of January 31,1997 and January 31, 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Deferred tax asset
Allowance for doubtful accounts,
reserves and other accrued expenses ...... $ 1,493,180 $ 1,648,049
Net operating loss ........................ 13,226,228 14,459,028
------------- -------------
Total deferred tax assets ............... 14,719,408 16,107,077
------------- -------------
Deferred tax liability
Property and depreciation .................. (856,173) (70,787)
Amortization .............................. (647,902) (270,421)
Other .................................... (318,165) (281,720)
------------- -------------
Total deferred tax liability ............ (1,822,240) (622,928)
------------- -------------
Deferred tax asset (liability) ............ 12,897,168 15,484,149
------------- -------------
Valuation allowance ........................ (14,251,349) (15,484,149)
============= =============
Net deferred tax asset (liability) ......... $ (1,354,182) $ 0
============= =============
</TABLE>
The Company reasonably believes that, because of limitations imposed by
the Internal Revenue Code, net operating losses of $33,065,570 and other
deferred tax assets, which arise out of OTI, will not be recognized in future
years. Accordingly, the Company has established a full valuation allowance for
these deferred tax assets.
The net operating losses of $33,065,570 will begin to expire in 2005.
The reconciliation of income tax computed at statutory rates to income tax
expense is as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Statutory rate ................................. 35% (35%)
Permanent differences ........................... 1% 0%
State income tax (net of federal benefit) ...... 5% 0%
Valuation allowance ........................... (7%) 35%
Other .......................................... 2% 0%
------ ------
36% 0%
====== ======
</TABLE>
15. Supplemental Cash Flow Information
During the year ended January 31, 1997, the month ended January 31, 1996
and the year ended December 31, 1995, the Company acquired the assets and
assumed certain liabilities of various entities. The transactions had the
following non-cash impact on the balance sheets:
F-32
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
January 31,
--------------------------------- December 31,
1997 1996 1995
--------------- --------------- ----------------
<S> <C> <C> <C>
Current assets ........................ $ 4,692,389 $ 123,963 $ 12,463,007
Property, plant and equipment ......... 4,693,603 70,418 40,817,404
Intangibles ........................... 49,593,414 12,666,694 43,155,934
Other noncurrent assets ............... 25,541 (8,895,714) 2,197,691
Current liabilities .................. (9,667,604) (1,267,752) (8,174,988)
Debt ................................. (3,189,295) 0 (43,179,672)
Noncurrent liabilities ............... (11,603,513) 1,248,139 (2,913,635)
Equity ................................. (10,010,325) (4,000,000) 0
------------- ------------ -------------
Net cash used for acquisitions ...... $ 24,534,210 $ (54,252) $ 44,365,741
============= ============ =============
</TABLE>
During the year ended January 31, 1997, the Company purchased $643,500 of
equipment under capital leases. In addition, cash paid for interest during the
year ended January 31,1997, one month ended January 31, 1996 and the year ended
December 31, 1995 was $5,450,718, $2,876,636 and $2,754,082, respectively.
Income taxes paid for the year ended January 31,1997 were $3,320,241. There was
no interest paid for the period from June 24, 1994 (inception) to December 31,
1994 and there were no income taxes paid for the one month ended January 31,
1996, the year ended December 31, 1995 or the period from June 24, 1994
(inception) to December 31, 1994.
16. Stock Option Plan
The Company has adopted a stock option plan and authorized the issuance of
3,000,000 shares of the Company's common stock to key employees and directors
of the Company. Under this plan, the exercise provision and price of the
options will be established on an individual basis generally with the exercise
price of the options being not less than the market price of the underlying
stock at the date of grant. The options generally will become exercisable
beginning in the first year after grant in 20%--33% increments per year and
expire ten years after the date of grant. Information related to the stock
option plan is summarized as follows:
<TABLE>
<CAPTION>
Year Ended Month Ended Year Ended
January 31, 1997 January 31, 1996 December 31, 1995
------------------------ ------------------------ ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ---------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of period ...... 1,200,500 $ 14.49 572,500 $ 10.93 127,500 $ 4.00
Options granted ........................ 1,122,500 20.35 628,000 17.27 445,000 13.65
Options exercised ..................... (52,166) 6.97 -- -- -- --
Options canceled ..................... (23,334) 18.14 -- -- -- --
--------- -------- ---------- --------- -------- --------
Outstanding, end of period ............ 2,247,500 17.52 1,200,500 $ 14.49 572,500 $ 10.93
========= ======== ========== ========= ======== ========
Weighted average fair value of
options granted during the year ...... $ 10.07 $ 7.36 $ 6.67
======== ========= ========
</TABLE>
At January 31, 1997, January 31, 1996 and December 31, 1995 options for
595,085, 47,500 and 47,500, respectively were exercisable.
F-33
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Significant option groups outstanding at January 31, 1997 and related
weighted average price and life are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ -------------------------
Shares Shares
Outstanding Weighted Exercisable Weighted
at Remaining Average at Average
Range of January 31, Contractual Exercise January 31, Exercise
Exercise Price 1997 Life Price 1997 Price
- ----------------- ------------- ------------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
$3.00 - $5.00 122,000 7.7 years $ 4.08 62,001 $ 4.16
$14.38 - $18.75 1,315,500 9.0 16.87 348,084 16.85
$19.00 - $24.75 810,000 9.5 20.72 185,000 20.45
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Sholes option-pricing model with the following weighted average
assumptions for grants in the year ended January 31, 1997, the one month ended
January 31, 1996 and the year ended December 31, 1995: expected volatility
(post-offering) of 56%, risk free interest rates of 6.4%, expected life of 4.5
years and expected dividends of $0.
The Company continues to account for stock based compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", as allowed by SFAS No. 123. Accordingly, no compensation cost has
been recognized for options granted. Had compensation for those plans been
determined based on the fair value at the grant date for awards during the year
ended January 31, 1997, the month ended January 31, 1996 and the year ended
December 31, 1995 consistent with SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
Year Ended Month Ended Year Ended
January 31, January 31, December 31,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss)
As reported .................. $12,057 $ (1,176) $ (11,025)
Pro forma .................. 9,647 (1,226) (11,073)
Earnings (loss) per common share
As reported .................. $ 0.54 $ (0.08) --
Pro forma .................. 0.43 (0.09) --
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
17. Net Income Per Share
Net income per common share is based upon the weighted average number of
common shares outstanding (including stock required to be issued in the future
pursuant to acquisition agreements) during the period. For the year ended
January 31, 1997 and the month ended January 31, 1996 the weighted average
number of common shares outstanding were 22,511,488 and 14,204,305
respectively. When dilutive, stock options (less the number of treasure shares
assumed to be purchased from the proceeds) are included in the calculation of
the weighted average number of common shares outstanding. For the year ended
January 31, 1997, conversion of the 63/4% Convertible Subordinated Debentures
issued in June 1996, is not assumed because the effect is anti-dilutive.
F-34
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
18. Segment Information (Unaudited)
The Company derives revenues from health care services and medical
facility development services. The Company commenced operations of the medical
facility development segment with the purchase of DASCO upon the completion of
the offering in January 1996. The activities related to the health care
services and medical facility development services segment are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Medical
Facility
Health Care Development
Year ended January 31, 1997 Services Services Total
--------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
Net revenues ..................... $ 170,912 $19,049 $ 189,961
Operating income .................. 9,417 11,133 20,550
Identifiable assets ............... 279,123 19,001 298,124
Depreciation & amortization ...... 6,856 288 7,144
Capital expenditures ............ 3,036 2,440 5,476
</TABLE>
19. Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly results of
operations for the periods shown:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Year Ended January 31, 1997
------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Net revenues ..................... $ 37,207 $ 40,424 $ 51,738 $ 60,592
Income before income taxes ...... 3,696 4,398 5,169 5,630
Net income ..................... 2,292 2,770 3,283 3,712
Net income per share ............ $ 0.11 $ 0.13 $ 0.15 $ 0.16
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1995
----------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------- ---------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net revenues .................. $ 6,669 $13,315 $ 20,134 $ 30,616
Loss before income taxes ...... (2,306)(A) (1,846) (2,332)(B) (4,541)(C)
Net loss(D) .................. (2,306)(A) (1,846) (2,332)(B) (4,541)(C)
</TABLE>
- ----------------
(A) Includes $1,111 non-recurring earnout payment.
(B) Includes $160 non-recurring earnout payment.
(C) Includes $2,500 provision for closure costs.
(D) Provisions for income taxes have not been reflected in the year ended
December 31, 1995 because there is no taxable income on a combined basis.
F-35
<PAGE>
PHYMATRIX CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
20. Subsequent Events
During February 1997, the Company closed in escrow on an agreement to
manage a physician group consisting of 32 physicians in Maryland.
During March 1997, the Company signed a binding letter of intent to merge
with Clinical Studies, Ltd. ("CSL"). CSL is one of the largest site management
organizations ("SMOs") in the country. SMOs are management service companies
that organize and manage multisite clinical investigators. CSL wholly owns and
operates 19 Phase I-IV research centers and is dedicated to the rapid
enrollment of quality volunteers for investigational drug research in multiple
therapeutic areas such as central nervous system, gerontology, women's health
and endocrinology. The merger is subject to being accounted for as a pooling of
interests.
During April, the Company signed a letter of intent with Beth Israel
Hospital to form an MSO to provide management services to the medical community
in the greater metropolitan New York area. The Company will acquire and manage
the physician practice management operations of Beth Israel Health Care System,
which consists of 130 physicians with more than 20 primary and specialty
medical offices located throughout New York City and Rockland and Westchester
counties.
F-36
<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
- -------------
F-37
<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.
F-38
<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.
F-39
<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.
F-40
<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.
F-41
<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.
F-42
<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.
F-43
<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.
F-44
<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.
F-45
<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
======
F-46
<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.
F-47-
<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.
F-48
<PAGE>
8. ACQUISITONS
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.
F-49
<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.
F-50
<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.
* * * * * *
F-51
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders of PhyMatrix Corp.(formerly known as
Continuum Care Corporation)
We have audited the supplemental consolidated financial statement of
financial position of PhyMatrix Corp. (formerly known as Continuum Care
Corporation) as of January 31, 1997 and the related supplemental consolidated
statements of operations, changes in shareholders' equity and cash flows for the
year ended January 31, 1997. We have also audited the accompanying supplemental
combined balance sheet of Phymatrix Corp. as of December 31, 1995 and the
related supplemental statements of operations, changes in shareholders' equity
and cash flows for the year ended December 31, 1995 and December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The supplemental financial statements give retroactive effect to the merger
of PhyMatrix Corp. and Clinical Studies Ltd. on October 15, 1997, which has been
accounted for as a pooling of interests as described in the Notes 2 and 3 to the
supplemental financial statements. Generally accepted accounting principles
proscribe giving effect to a consummated business combination accounted for by
the pooling of interests methods in financial statements that do not include the
date of consummation. These financial statements do not extend through the date
of consummation; however, they will become the historical consolidated financial
statements of PhyMatrix Corp. after financial statements covering the date of
consummation of the business combination are issued.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of PhyMatrix Corp.
as of January 31, 1997 and the consolidated results of its operations and its
cash flows for the years ended January 31, 1997 in conformity with generally
accepted accounting principles applicable after financial statements are issued
for a period which includes the date of consummation of the business
combination. Further, in our opinion, the financial statements referred to above
present fairly, in all material respects, the combined financial position of
PhyMatrix Corp. as of December 31, 1995 and the combined results of operations
and its cash flows for the year ended December 31, 1995 and December 31, 1994
in conformity with generally accepted accounting principles after financial
statements are issued for a period which includes the date of consummation of
the business combination.
Boston, Massachusetts
October 20, 1997
F-52
<PAGE>
PHYMATRIX CORP.
SUPPLEMENTAL BALANCE SHEETS
<TABLE>
<CAPTION>
Consolidated Consolidated Combined
July 31, January 31, December 31,
1997 1997 1995
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 59,383,098 $ 81,321,955 $ 7,192,367
Receivables:
Accounts receivable, net of allowances 56,581,408 41,743,737 22,920,874
Other receivables 3,440,009 2,318,395 569,923
Notes receivable (Note 4) 2,364,537 10,125,000 516,000
Prepaid expenses and other current assets 5,538,993 3,680,709 1,276,535
------------ ------------ ------------
Total current assets 127,308,045 139,189,796 32,475,699
Property, plant and equipment, net (Note 5) 40,846,212 39,128,292 39,734,091
Notes receivable (Note 4) 7,884,700 4,938,700 170,400
Goodwill, net (Note 2) 92,064,612 74,426,572 31,931,453
Management service agreements, net (Note 2) 56,078,028 40,196,102 16,376,636
Investment in affiliates (Note 6) 3,517,934 3,399,859 12,925,129
Other assets (including restricted cash) 12,600,540 12,030,884 4,853,659
------------ ------------ ------------
Total assets 340,300,071 313,310,205 138,467,067
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of debt and capital leases (Note 8) $ 3,609,281 $ 3,835,569 $ 26,707,091
Current portion of related party debt (Note 8) - - 4,740,588
Accounts payable 8,113,751 9,436,189 6,785,296
Accrued compensation 1,420,822 1,480,250 1,124,316
Accrued and other current liabilities (Note 7) 13,956,170 12,627,164 11,307,712
Accrued interest - shareholder (Note 11) - - 1,708,174
------------ ------------ ------------
Total current liabilities 27,100,024 27,379,172 52,373,177
Due to shareholder, less current portion (Notes 8 and 11) - 36,690,180
Long-term debt and capital leases, less current
maturities (Note 8) 16,882,415 14,994,690 28,952,407
Convertible subordinated debentures 100,000,000 100,000,000 -
Other long term liabilities (Notes 3 and 7) 11,759,706 14,004,143 2,511,122
Deferred tax liability (Note 14) - 1,354,182 -
Minority interest 1,854,455 1,798,321 2,502,970
------------ ------------ ------------
Total liabilities 157,596,600 159,530,508 123,029,856
Commitments and contingencies (Notes 9 and 10)
Shareholders' equity
Common stock, par value $.01, 40,000,000 shares authorized,
29,131,155, 27,625,338, and 4,885,512 shares issued
and outstanding at July 31, 1997, January 31, 1997,
and December 31, 1995, respectively 291,312 276,253 48,855
Additional paid in capital 169,856,597 150,025,403 25,071,445
Retained earnings (deficit) 12,555,562 3,478,041 (9,683,089)
------------ ------------ ------------
Total shareholders' equity 182,703,471 153,779,697 15,437,211
------------ ------------ ------------
Total liabilities and shareholders' equity $340,300,071 $313,310,205 $138,467,067
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the
supplemental financial statements.
F-53
<PAGE>
PHYMATRIX CORP.
SUPPLEMENTAL STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Consolidated Consolidated
Six Months Six Months Consolidated Combined Combined
Ended Ended Year Ended Year Ended Year Ended
July 31, July 31, January 31, December 31, December 31,
1997 1996 1997 1995 1994
------------ ----------- ------------ ----------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues from services $ 83,089,705 $ 48,139,067 $117,813,401 $61,712,559 $7,368,106
Net revenue from management service agreements 75,685,223 36,523,555 90,187,458 22,372,566 -
------------ ----------- ------------ ----------- ---------
Total revenue 158,774,928 84,662,622 208,000,859 84,085,125 7,368,106
------------ ----------- ------------ ----------- ---------
Operating costs and administrative expenses:
Cost of affiliated physician
management services 33,534,991 17,412,247 42,245,211 9,655,973 -
Salaries, wages and benefits 39,132,470 26,689,277 58,350,848 33,540,769 3,021,502
Salaries, wages and benefits - related
party (Note 11) - - - 2,267,891 934,200
Professional fees 4,254,723 3,065,137 7,321,849 4,466,897 874,412
Professional fees - related party (Note 11) - - - 273,941 253,995
Supplies 19,900,444 11,665,084 27,202,905 12,117,362 682,956
Utilities 2,107,449 1,321,822 2,868,484 1,498,755 201,639
Depreciation and amortization 4,856,994 3,313,419 7,381,666 3,955,511 166,238
Rent 7,156,746 3,836,498 8,518,812 4,642,144 361,891
Rent - related party (Note 11) - - - 459,732 192,242
Earn out payment (Note 11) - - - 1,271,000 -
Provision for closure loss (Note 7) - - - 2,500,000 -
Provision for bad debts - 1,320,777 4,607,888 744,111 -
Other 33,198,534 6,797,839 26,359,859 9,797,589 1,729,380
Other - related party (Note 11) - - - 728,116 249,316
------------ ----------- ------------ ----------- ---------
144,142,351 75,422,100 184,857,522 87,919,791 8,667,771
------------ ----------- ------------ ----------- ---------
Interest expense, net 1,673,963 392,973 1,357,210 3,120,056 95,774
Interest expense shareholder (Note 11) - 369,366 369,366 1,708,174 -
(Income) loss from investment in affiliates (412,985) (268,998) (709,295) (569,156) -
------------ ----------- ------------ ----------- ---------
1,260,978 493,341 1,017,281 4,259,074 95,774
------------ ----------- ------------ ----------- ---------
Income (loss) before provision for income taxes 13,371,599 8,747,181 22,126,056 (8,093,740) (1,395,439)
Income tax expense 4,545,904 3,031,881 6,836,066 - -
------------ ----------- ------------ ----------- ---------
Net income (loss) (Note 2) $ 8,825,695 $ 5,715,300 $ 15,289,990 $(8,093,740) $(1,395,439)
============ ========== =========== =========== ===========
Net income per weighted average share $ 0.30 $ 0.21 $ 0.55
Proforma Information (Note 2):
Adjustment to income tax expense $ 251,792 $ 261,116 $ 1,293,385
Net income $ 8,573,903 $ 5,454,184 $ 13,996,605
Net income per weighted average share $ 0.29 $ 0.20 $ 0.51
Weighted average shares outstanding 29,152,416 26,776,563 27,703,073
============ ============ ============
</TABLE>
F-54
The accompanying notes are an integral part of the
supplemental financial statements.
<PAGE>
PHYMATRIX CORP.
SUPPLEMENTAL STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the six months ended July 31, 1997 (unaudited)
and the years ended January 31, 1997, December 31, 1995 and December 31, 1994
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings
Outstanding Paid-in (Accumulated
Shares Amount Capital Deficit) Total
------ ------ ---------- ------------ -----
<S> <C> <C> <C> <C> <C>
Balances - January 1, 1994, as
previously reported - $ - $ - $ - $ -
Pooling of interests with CSL (as
defined in Note 1) 4,885,512 48,855 $ 71,445 26,090 146,390
Capital Contribution - - 12,963,713 - 12,963,713
Net loss for the year ended
December 31, 1994 - - - (1,395,439) (1,395,439)
---------- --------- ------------ ------------ ------------
Balances - December 31, 1994 4,885,512 48,855 13,035,158 (1,369,349) 11,714,664
Capital contribution - - 12,036,287 - 12,036,287
Net loss for the year ended
December 31, 1995 - - - (8,093,740) (8,093,740)
Dividends - - - (220,000) (220,000)
---------- --------- ------------ ------------ ------------
Balances - December 31, 1995 4,885,512 48,855 25,071,445 (9,683,089) 15,437,211
Initial Public Offering,
net of costs 21,263,284 212,633 111,494,224 - 111,706,857
Issuance of common stock
for acquisitions 266,666 2,667 3,997,333 - 4,000,000
Issuance of stock pursuant to
pooling of interests with CSL 318,793 3,188 624,452 - 627,640
Adjustment for immaterial pooling
of interests 432,645 4,326 - 778,960 783,286
Issuance Costs - - (743,316) (743,316)
Issuance of stock pursuant
to acquisitions 406,272 4,062 9,222,977 - 9,227,039
Issuance of stock pursuant
to stock plans 52,166 522 358,288 - 358,810
Net loss for the month ended
January 31, 1996 - - - (1,176,228) (1,176,228)
Net income for the year ended
January 31, 1997 - - - 15,289,990 15,289,990
Dividends - - - (1,731,592) (1,731,592)
---------- --------- ------------ ------------ ------------
Balances - January 31, 1997 27,625,338 276,253 150,025,403 3,478,041 153,779,697
Adjustment for immaterial pooling
of interests - - - 644,326 644,326
Effect of CSL's excluded activity
(as described in Note 2) - - - 344,700 344,700
Issuance of stock pursuant to
acquisitions 1,435,818 14,359 19,251,281 - 19,265,640
Issuance of stock pursuant
to stock plans 69,999 700 656,275 - 656,975
Issuance costs - - (76,362) (76,362)
Net income for the six months
ended July 31, 1997 - - - 8,825,695 8,825,695
Dividends - - - (737,200) (737,200)
---------- --------- ------------ ------------ ------------
Balances - July 31, 1997 29,131,155 $ 291,312 $169,856,597 $ 12,555,562 $182,703,471
========== ========= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the
supplemental financial statements.
F-55
<PAGE>
PHYMATRIX CORP.
SUPPLEMENTAL STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Consolidated Consolidated
Six Months Six Months Consolidated Combined Combined
Ended Ended Year Ended Year Ended Year Ended
July 31, July 31, January 31, December 31, December 31,
1997 1996 1997 1995 1994
------------ ----------- ------------ ------------ -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 8,825,695 $ 5,715,300 $ 15,289,990 $ (8,093,740) $(1,395,439)
Noncash items included in net income (loss):
Depreciation and amortization 4,856,994 3,313,419 7,381,666 3,955,511 166,238
Amortization of debt issuance costs - - 276,625 - -
Writedown of assets - - - 1,554,607 -
Issuance of common stock as compensation - 627,640 627,640 - -
Other (626,401) 19,252 (650,940) 140,151 -
Changes in receivables (11,055,818) (8,289,561) (14,154,057) (7,415,851) (418,869)
Changes in accounts payable and accrued
liabilities (2,310,415) (2,014,310) (4,642,545) 11,235,272 231,417
Changes in other assets (1,755,154) (1,888,510) 1,517,672 (1,511,032) 2,473
------------ ----------- ------------ ------------ -----------
Net cash provided (used) by
operating activities (2,065,099) (2,516,770) 5,646,051 (135,082) (1,414,180)
Cash flows from investing activities:
Capital expenditures (2,855,448) (1,750,859) (5,686,484) (1,378,630) (181,264)
Sale of assets 1,490,000 - 1,243,762 - -
Notes receivable, net 4,689,463 (250,000) (15,213,700) (686,400) 160,000
Purchase of investments in affiliates - - - (9,790,588) (2,661,511)
Other assets (605,490) (84,285) (1,440,176) (20,287) -
Acquisitions, net of cash acquired (Note 15) (22,250,306) (6,980,003) (27,734,210) (44,365,741) (8,183,902)
------------ ----------- ------------ ------------ -----------
Net cash used by investing
activities (19,531,781) (9,065,147) (48,830,808) (56,241,646) (10,866,677)
Cash flows from financing activities:
Capital contributions - - - 12,036,287 12,963,713
Borrowings under revolving line of credit, net 1,000,000 - 3,132,300 - -
Advances from (repayment to) shareholders - (15,446,759) (15,523,287) 36,690,180 -
Proceeds from issuance of common stock 649,727 205,000 359,614 200 -
Dividends to stockholders (737,200) (1,243,998) (1,731,592) (220,000) -
Proceeds from issuance of convertible
subordinated debentures (114,281) 97,102,738 96,565,758 - -
Proceeds from issuance of debt 361,449 - - 19,143,127 -
Release of cash collateral 480,182 1,537,282 1,996,786 - -
Offering costs and other (618,658) (2,344,363) (2,823,130) (1,030,632) -
Repayment of debt (1,691,136) (5,486,414) (7,178,810) (3,834,714) (96,676)
----------- ----------- ----------- ----------- ----------
Net cash provided (used) by
financing activities (669,917) 74,323,486 74,797,639 62,784,448 12,867,037
Increase in cash and cash equivalents (22,266,797) 62,741,569 31,612,882 6,407,720 586,180
Cash and cash equivalents, beginning of period 81,649,895 49,709,073 49,709,073 784,647 198,467
------------ ----------- ----------- ---------- ----------
Cash and cash equivalents, end of period $ 59,383,098 $ 112,450,642 $ 81,321,955 $ 7,192,367 $ 784,647
============= ============ ============ ========== ==========
</TABLE>
The accompanying notes are an integral part of the
supplemental financial statements.
F-56
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
1. Description of Business and Organization
PhyMatrix Corp. ("the Company") is a multispecialty physician management
company that provides management services to the medical community. PhyMatrix
also develops medical malls, medical office buildings, and health parks, both
for its own account and for leading hospitals and health systems.
PhyMatrix Corp., formerly known as Continuum Care Corporation, was formed
to create a health care company which consummated an initial public offering
(the "offering") during January 1996 and simultaneously exchanged 13,040,784
shares of its Common Stock for all of the outstanding Common Stock of several
business entities (the "IPO entities") which were operated under common control
prior to the offering by Abraham D. Gosman, and with respect to DASCO
Development Corporation and affiliate (collectively, "DASCO"), by Mr. Gosman,
Bruce A. Rendina and Donald A. Sands (collectively, the Principal Shareholders
of the Company), since their respective dates of acquisition. Subsequent to the
offering, the Company changed its fiscal year end from December 31 to January
31.
During October 1997, a subsidiary of the Company merged with Clinical
Studies Ltd. ("CSL"). This business combination was accounted for as a pooling
of interests. CSL is a site management organization conducting clinical research
for pharmaceutical companies and clinical research organizations at 22 centers
located in 11 states. Accordingly, the financial statements for all periods
prior to the effective date of the merger have been restated to include CSL and
Clinical Marketing Ltd. ("CML") which was merged into CSL on January 1, 1997.
Prior to the offering, each of the acquisitions of the business entities,
except where otherwise noted, was accounted for under the purchase method of
accounting and was recorded at the price paid by companies controlled by Mr.
Gosman when they purchased the entities from third parties. The audited combined
financial statements for the years ended December 31, 1994 and December 31, 1995
have been prepared to reflect the combination of these business entities which
have operated since their purchase date under common control. Because certain of
these entities operated under common control were nontaxpaying (i.e., primarily
S corporations, which results in taxes being the responsibility of the
respective owners), the financial statements for the years ended December 31,
1994 and December 31, 1995 have been presented on a pretax basis, as further
described in Note 2.
The Company filed a Registration Statement on Form S-1 with the Securities
and Exchange Commission in connection with the offering which became effective
January 23, 1996. In connection with the offering, the Company issued 8,222,500
shares of Common stock. As of January 31, 1997, net proceeds to the Company were
$110,963,541, which was net of underwriting discounts and commissions and
offering expenses. The Company used approximately $71,500,000 from the net
proceeds of the offering to repay certain indebtedness and obligations that
arose from certain acquisitions. The remaining net proceeds have and will
continue to be used for general corporate purposes, including future
acquisitions and working capital.
During June 1996, the Company raised $100 million through the sale of its
6-3/4% Convertible Subordinated Debentures (the "Debentures") to certain
institutional investors and non-U.S. investors. The Debentures are convertible
into shares of the Company's Common Stock at a conversion price of $28.20 per
share, and are due in 2003. As of January 31, 1997, net proceeds to the Company
from the Debentures, after deduction of the initial purchasers' discounts and
commissions and offering expenses, were $96,565,758. The Company used
approximately $10,752,000 from the net proceeds of the Debenture offering to
repay advances from the principal shareholder. During July 1996, the Company
filed a Registration Statement on Form S-1 with the Securities and Exchange
Commission to register the resale of the Debentures by the holders thereof.
During July 1996, the Company also filed a Registration Statement on Form
S-4 with the Securities and
F-57
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
Exchange Commission with respect to the registration of an aggregate of up to
5,000,000 shares of Common Stock which may be issued by the Company from time to
time in connection with various acquisitions that it may make.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its 50% or greater owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
Estimates Used in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
are used when accounting for the collectibility of receivables and third party
settlements, depreciation and amortization, taxes and contingencies.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid instruments with
original maturities at the time of purchase of three months or less.
Revenue Recognition
Net revenue from services is reported at the estimated realizable amounts
from patients, third-party payors and others for services rendered. Revenue
under certain third-party payor agreements is subject to audit and retroactive
adjustments. Provisions for estimated third-party payor settlements and
adjustments are estimated in the period the related services are rendered and
adjusted in future periods as final settlements are determined. The provision
and related allowance are adjusted periodically, based upon an evaluation of
historical collection experience with specific payors for particular services,
anticipated reimbursement levels with specific payors for new services, industry
reimbursement trends, and other relevant factors.
Net revenues from management service agreements equals the net revenue
generated by the physician practices. Under the agreements, the Company is
responsible and at risk for the operating costs. The costs include the
reimbursement of all medical practice operating costs and payments to physicians
(which are reflected as cost of affiliated physician management services).
Net revenues from clinical studies equals the fees to be received as
services are provided to patients enrolled in the studies. Revenues are
recognized as patient visits are conducted and such services are provided.
Payments received prior to providing services are recorded as unearned revenue.
Included in accounts receivable at January 31, 1997 and December 31, 1995 are
unbilled contract receivables of $5,497,469 and $2,210,028, respectively.
Net revenues from medical facility development are recognized at the time
services are performed. In some cases fees are earned upon the achievement of
certain milestones in the development process, including the receipt of a
building permit and a certificate of occupancy of the building. Unearned revenue
relates to all fees received in advance of services being completed on
development projects.
F-58
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
Accounting Developments
The Emerging Issues Task Force (the "Task Force") of the Financial
Accounting Standards Board has added an agenda item to review various accounting
and reporting matters relating to the physician practice management industry.
Among other things, the Task Force plans to address the consolidation of
revenues of professional associations and accounting for business combinations.
Although the company believes that its accounting and reporting practices are in
conformity with generally accepted accounting principles and common industry
practice, there can be no assurance that the conclusions reached by the Task
Force will not have a material impact on the Company.
Third Party Reimbursement
For the years ended January 31, 1997, December 31, 1995, and December 31,
1994, approximately 31%, 34%, and 11%, respectively, of the Company's net
revenue was primarily from the participation of the Company's home health care
entities and physician practices in Medicare programs. Medicare compensates the
Company on a "cost reimbursement" basis for home health care, meaning Medicare
covers all reasonable costs incurred in providing home health care. Medicare
compensates the Company for physician services based on predetermined fee
schedules. In addition to extensive existing governmental health care
regulation, there are numerous initiatives at the federal and state levels for
comprehensive reforms affecting the payment for and availability of health care
services. Legislative changes to federal or state reimbursement systems could
adversely and retroactively affect recorded revenues.
Contract Receivables
The Company's businesses could be impacted by the failure of key customers,
increasing competition in the pharmaceutical drug testing industry, federal and
state legislation in the area of pharmaceutical drug testing industry, federal
and state legislation in the area of pharmaceutical drug testing and the
departure of key trial investigators. Also, for a number of clinical trial
programs, the Company believes that the industry protocols have resulted in
final settlement of contract receivables being prolonged due to delays in the
finalization of the testing program and data analysis. Changes in these areas
could adversely impact the Company's operations in the future.
Property and Equipment
Additions are recorded at cost, or in the case of capital lease property at
the lower of fair market value at the inception of the lease or the present
value of the minimum lease payments required, and depreciation is recorded
principally by use of the straight-line method of depreciation for buildings,
improvements and equipment over their useful lives. Upon disposition, the cost
and related accumulated depreciation are removed from the accounts and any gain
or loss is included in income. Maintenance and repairs are charged to expense as
incurred. Major renewals or improvements are capitalized. Assets recorded under
capital leases are amortized over the shorter of their estimated useful lives or
the lease terms.
Income Taxes
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Deferred taxes arise
primarily from the recognition of revenues and expenses in different periods for
income tax and financial reporting purposes.
Prior to the offering, certain of the entities subsequently purchased by
the Company were S Corporations or partnerships; accordingly, income tax
liabilities were the responsibility of the respective owners or partners.
F-59
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
Provisions for income taxes and deferred assets and liabilities of the taxable
entities were not reflected in the combined financial statements prior to the
offering since there was no taxable income on a combined basis.
Prior to the CSL merger, CSL was treated as a S corporation under the
Internal Revenue Code (the "Code") and its stockholders recognized its income
for income tax purposes. Accordingly, the Company's statements of operations do
not include provisions for income taxes for income related to CSL. Prior to the
CSL merger, dividends were paid primarily to reimburse stockholders for income
tax liabilities incurred.
Pro Forma Information
The pro forma net income and net income per share information in the
consolidated statement of operations reflect the effect on historical results as
if CSL had been a C corporation rather than a S corporation and had paid income
taxes.
Goodwill
Goodwill relates to the excess of cost over the value of net assets of the
businesses acquired. Amortization is calculated on a straight line basis over
periods ranging from ten to 40 years. Accumulated amortization of goodwill was
$2,771,727 and $840,928 at January 31, 1997 and December 31, 1995, respectively.
Management Service Agreements
Management service agreements consist of the costs of purchasing the rights
to manage medical oncology and physician groups. These costs are amortized over
the initial noncancelable terms of the related management service agreements
ranging from ten to 40 years. Under the long-term agreements, the medical groups
have agreed to provide medical services on an exclusive basis only through
facilities managed by the Company. The agreements are noncancelable except for
performance defaults. In the event a medical group breaches the agreement, or if
the Company terminates with cause, the medical group is required to purchase all
related assets, including the unamortized portion of any intangible assets,
including management service agreements, at the then net book value. Accumulated
amortization of management service agreements was $1,640,765 and $254,741 at
January 31, 1997 and December 31, 1995.
Debt Issuance Costs
Offering costs of approximately $3,434,242 related to the Debentures have
been deferred and are being amortized over the life of the Debentures.
Amortization expense of $276,625 has been included as interest expense in the
accompanying financial statements for the year ended January 31, 1997.
Long-Lived Assets
The Company periodically assesses the recoverability of long-lived assets,
including property and equipment and intangibles, when there are indications of
potential impairment, based on estimates of undiscounted future cash flows. The
amount of impairment is calculated by comparing anticipated discounted future
cash flows with the carrying value of the related asset. In performing this
analysis, management considers such factors as current results, trends and
future prospects, in addition to other economic factors.
F-60
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
Investments
The equity method of accounting is used for investments when there exists a
noncontrolling ownership interest in another company that is greater than 20%.
Under the equity method of accounting, original investments are recorded at cost
and adjusted by the Company's share of earnings or losses of such companies, net
of distributions.
Net Income (Loss) Per Common Share
Net income (loss) per common share is calculated based on net income (loss)
divided by the weighted average number of common shares outstanding during the
year.
Stock Option Plans
On February 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation", which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made during the
year ended January 31, 1997 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
Accounting Developments
During 1997, the Financial Accounting Standards Board issued FASB Statement
No. 128, "Earnings Per Share". This standard is designed to improve the Earnings
Per Share ("EPS") information provided in financial statements by simplifying
the existing computational guidelines, revising the disclosure requirements and
increasing the comparability of EPS data on an international basis. The Company
will implement the new standard in its fiscal year ending January 31, 1998.
Management believes that the Company's adoption of this Standard, when
effective, will not have a significant impact on the Company's financial
statements.
Unaudited Financial Statements
The financial statements for the six months ended July 31, 1997 and 1996
are unaudited and include all adjustments which are, in the opinion of
management, necessary for a fair statement of the results for the interim
periods. The interim results for the six months ended July 31, 1997 are not
necessarily indicative of results to be expected for the year ended January 31,
1998.
Fiscal Year
Upon the completion of the merger during October 1997, CSL changed its
fiscal year end from December 31 to January 31. Amounts consolidated for CSL
during the six months ended July 31, 1996 and the year ended January 31, 1997
were based on a December 31 fiscal year end. As a result, CSL's historical
results of operations for the month ending January 31, 1997 are not included in
the Company's consolidated statements of operations or cash flows.
Restatement of Financial Statements
The supplemental consolidated financial statements of the Company have been
prepared to give retroactive effect to the merger with CSL on October 15, 1997.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling of interests
methods in financial statements that do not include the date of consummation;
however, they will become the historical consolidated financial
F-61
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
statements of PhyMatrix after financial statements covering the date of
consummation of the business combination are issued.
Reclassifications
Certain prior year balances have been reclassified to conform with the
current year presentation.
3. Acquisitions
The following table sets forth the acquisitions completed by the Company
during the year ended January 31, 1997 with the respective purchase dates,
purchase prices and amounts allocated to intangibles. Each of the acquisitions
was accounted for under the purchase method of accounting, except where noted
otherwise.
<TABLE>
<CAPTION>
Amounts
Allocated
to Intangibles
-----------------------
Management
Date Purchase Service
Business Acquired Purchased Price Goodwill Contracts
- ----------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Employed physicians......................... Various $ 3,213,399 $ 2,862,035 $ --
Managed Physician Practices:
o Atlanta Gastroenterology.................. May 1996 6,100,000 -- --
o Oncology Care Associates.................. May 1996 609,124 -- 609,124
o Busch..................................... May 1996 787,864 -- 457,772
o Dal Yoo................................... June 1996 426,427 -- 291,874
o Koerner, Taub & Flaxman................... July 1996 948,610 -- 328,838
o Atlanta Metro Urology..................... July 1996 755,163 -- 399,974
o Atlantic Pediatrics....................... August 1996 412,539 -- 328,074
o Insignia Care for Women, P.A.............. August 1996 3,439,331 -- 2,625,699
o Georgia Surgical Associates, P.C.......... August 1996 1,548,756 -- 1,116,259
o Ankle & Foot Center of Tampa Bay, P.A..... August 1996 3,294,499 -- 3,161,192
o Boynton GI Group.......................... October 1996 1,341,521 -- 670,000
o Atlanta Specialists in Gastroenterology... January 1997 1,578,205 -- --
o American Regional Health Center........... January 1997 6,029,272 -- 4,640,493
o Access Medical Care....................... January 1997 4,500,652 -- 3,814,400
Medical Support Services:
o Clinical Research Specialists............. August 1996 521,025(B) 521,025 -
o Delaware Valley Clinical Studies.......... October 1996 6,850,000(B) 6,850,000 -
o Outpatient Center of Boynton Beach, LTD... October 1996 4,755,255 -- 2,597,409
Management Services Organizations
and Contract Management:
o Physicians Choice Management, LLC......... December 1995 12,148,822 12,099,111 --
o Central Georgia Medical Management, LLC... April 1996 673,262 1,023,261 --
o New Jersey Medical Management, LLC........ September 1996 454,168 541,668 --
o Physicians Consultant and Management...... September 1996 2,000,000(A) 3,078,568 --
Corporation
o New York Network Management, LLC.......... November 1996 1,258,861 2,661,800 --
- ---------------
</TABLE>
(A) In addition to the base purchase price, there is a contingent payment up to
a maximum of $10,000,000 based on the earnings before taxes during the next
five years.
(B) In addition to the base purchase price, there is a contingent payment based
on earnings before taxes over the next five years.
F-62
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
Year Ended January 31, 1997 and the Six Months Ended July 31, 1997 Acquisitions
Physician Practice Acquisitions
Between April and June 1996, the Company purchased the assets of and
entered into employment agreements with Drs. Lawler, Cutler and Surowitz. The
total purchase price for these assets was $2,154,999 in cash and 69,799 shares
of Common Stock of the Company were issued during July 1997 having a value of
$1,058,400. The value of the Common Stock issued had been recorded in other
long-term liabilities at January 31, 1997. The purchase price has been allocated
to the assets at their fair market value including goodwill of $2,862,035. The
resulting goodwill is being amortized over 20 years.
During May 1996, the Company purchased the stock of Atlanta
Gastroenterology Associates, P.C. pursuant to a tax free merger and entered into
a 40-year management agreement with the medical practice in exchange for 324,252
shares of Common Stock of the Company having a value of approximately
$6,100,000. The transaction has been accounted for using the
pooling-of-interests method of accounting.
During May 1996, the Company amended its existing management agreement with
Oncology Care Associates and extended the term of the agreement to 20 years.
Simultaneously, the Company expanded the Oncology Care Associates practice by
adding three oncologists whose practices of whom the Company acquired for
$609,124. $309,124 of such purchase price was paid in cash and 20,684 shares of
Common Stock of the Company were issued in July 1997 having a value of $300,000.
The purchase price has been allocated to the assets at their fair market value,
including management service agreements of approximately $609,124. The resulting
intangible is being amortized over 20 years.
During May and June 1996, the Company entered into agreements to purchase
the assets of and entered into 20-year management agreements with two physician
practices consisting of three physicians. These practices are located in South
Florida and Washington, D.C. The total purchase price for the assets of these
practices was $1,214,291. Of this amount, $663,667 was paid in cash and 29,350
shares of Common Stock of the Company were issued during May and June 1997
having a value $550,954. The value of the Common Stock issued had been recorded
in other long-term liabilities at January 31, 1997. The purchase price has been
allocated to the assets at their fair market value, including management service
agreements of $749,646. The resulting intangible is being amortized over 20
years.
During July 1996, the Company purchased the assets of and entered into a
20-year management agreement with four physicians in Florida. The purchase price
for these assets was approximately $948,610, which was paid in cash. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $328,838. The resulting intangible is
being amortized over 20 years.
During July 1996, the Company purchased the assets of and entered into a
20-year management agreement with three urologists in Atlanta, Georgia. The
purchase price for these assets was $755,163. Of such purchase price, $475,163
was paid in cash and 18,064 shares of Common Stock of the Company were issued
during July 1997 having a value of $280,000. The value of the Common Stock
issued had been recorded in other long-term liabilities at January 31, 1997. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of approximately $399,974. The resulting
intangible is being amortized over 20 years.
During August 1996, the Company purchased the assets of and entered into a
management agreement with Atlantic Pediatrics. The purchase price for these
assets was $412,539. Simultaneous with the closing, Atlantic Pediatrics was
merged into Osler Medical, Inc. During the second quarter of 1996, the Company
also acquired
F-63
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
certain copyright and trademark interests for a purchase price of $887,000. The
total purchase price for the assets acquired was allocated to such assets at
their fair market value, including management service agreements of $1,215,074.
The resulting intangible is being amortized over 20 years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with eight physicians in Florida. The purchase
price for these assets was $3,439,331. Of such purchase price, $1,519,331 was
paid in cash and 122,841 shares of Common Stock of the Company were issued
during August 1997 having a value of $1,920,000. The value of the Common Stock
issued had been recorded in other long-term liabilities at January 31, 1997. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $2,625,699. The resulting intangible
is being amortized over 40 years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with four physicians in Georgia. The purchase price
for these assets was $1,548,756. Of such purchase price, $855,956 was paid in
cash and 44,126 shares of Common Stock of the Company were issued during August
1997 having a value of $692,800. The value of the Common Stock issued had been
recorded in other long-term liabilities at January 31, 1997. The purchase price
has been allocated to these assets at their fair market value, including
management service agreements of $1,116,259. The resulting intangible is being
amortized over 40 years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with 10 physicians in Florida. The purchase price
for these assets was $3,294,499. Of such purchase price, $920,099 was paid in
cash and 192,649 shares of Common Stock of the Company were issued during
September 1997 having a value of $2,374,400. The value of the Common Stock
issued had been recorded in other long-term liabilities at January 31, 1997. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $3,161,192. The resulting intangible
is being amortized over 40 years.
During October 1996, the Company purchased the assets of and entered into
20-year management agreements with five physicians in Florida. The purchase
price for these assets was $1,341,521. Of such purchase price $806,521 was paid
in cash and 33,331 shares of Common Stock of the Company were issued during
October 1997 having a value of $535,000. The value of the Common Stock issued
had been recorded in other long-term liabilities at January 31, 1997. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $670,000. The resulting intangible is
being amortized over 20 years.
During January 1997, the Company purchased the stock of Atlanta Specialists
in Gastroenterology pursuant to a merger and entered into a 40-year management
agreement with the medical practice in exchange for 108,393 shares of Common
Stock of the Company having a value of approximately $1,578,205. The transaction
was accounted for using the pooling-of-interests method of accounting.
During January 1997, the Company purchased the assets of and entered into a
40-year management agreement with 14 physicians in Texas. The purchase price for
these assets was $6,029,272. Of such purchase price,
F-64
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
$2,333,272 was paid in cash and $3,696,000 is payable during January 1998 in
Common Stock of the Company with such number of shares to be purchased based
upon the average price of the stock during the five business days prior to the
issuance. The value of the Common Stock to be issued has been recorded in other
long-term liabilities at January 31, 1997. The purchase price has been allocated
to these assets at their fair market value, including management service
agreements of $4,640,493. The resulting intangible is being amortized over 40
years.
During January 1997, the Company purchased the assets of and entered into a
40-year management agreement with 18 physicians in Florida. The purchase price
for these assets was $4,500,652. Of such purchase price, $2,273,613 was paid in
cash, $1,500,000 of bank debt was assumed and 42,830 shares of Common Stock were
issued having a value of $727,039. The purchase price has been allocated to
these assets at their fair market value, including management service agreements
of $3,814,400. The resulting intangible is being amortized over 40 years.
During February 1997, the Company purchased the stock of a six physician
practice pursuant to a merger and entered into a 40-year management agreement
with the practice in exchange for 159,312 shares of Common Stock of the Company
having a value of approximately $2,440,000. The transaction has been accounted
for using the pooling-of-interests method of accounting.
During February 1997, the Company purchased the assets of and entered into
a 40-year management agreement with five physicians in Utah. The purchase price
was $2,498,148. Of such purchase price, $1,378,148 was paid in cash and 75,293
shares of Common Stock of the Company were issued having a value of $1,120,000.
The purchase price was allocated to the assets at their fair market value,
including management service agreements of $1,499,013. The resulting intangible
is being amortized over 40 years.
During May 1997, the Company entered into a 40-year management agreement
with a radiation therapy center in Westchester, New York. The purchase price was
$2,550,000. Of such purchase price $1,200,000 was paid in cash and $1,350,000 is
payable during May 1998 in Common Stock of the Company with such number of
shares to be issued based upon the average price of the stock during the five
business days prior to the issuance. The value of the Common Stock to be issued
has been recorded in other long-term liabilities at July 31, 1997. The purchase
price has been allocated to management service agreements and is being amortized
over 40 years.
During July 1997, the Company entered into a management services agreement
with Beth Israel Hospital to manage its DOCS Division which consists of more
than 100 physicians located throughout the greater Metropolitan New York area.
In addition, the Company and Beth Israel Hospital will be completing the
formation of an MSO to manage the medical risk contracting to the more than
2,000 physicians affiliated with Beth Israel Hospital and its parent
corporation. The Management Services Agreement became effective July 1, 1997,
and will remain in effect for 40 years contingent upon the closing of the MSO
joint venture prior to January 15, 1998. The Company has committed up to $40
million in conjunction with the transaction to be utilized for the expansion of
the Beth Israel delivery system throughout the New York region. In connection
with the agreement, the Company paid $13,560,000 in cash, which was allocated to
management service agreements and is being amortized over 40 years.
Medical Support Services Companies Acquisitions and CSL Merger
Acquisitions
During August 1996, the Company acquired the business and certain assets of
a single site clinical research company in Sarasota, Florida for $300,000 plus
contingent consideration based on profitability measures over the next five
years. The purchase price consisted of $100,000 of cash and the issuance of two
subordinated promissory notes of $100,000 each. The contingent payments will
equal 15% of the increase in adjusted income before tax, of the acquired
business, over the prior year's amount. The contingent payments will not be less
than $221,025. The full amount of the minimum payments was accrued for at the
date of the acquisition. During October 1996, the Company acquired the business
and certain assets of a multi-site clinical research company in Pennsylvania for
$6,850,000 plus contingent consideration based on profitability measures over
the next five years. The purchase price consisted of $3,100,000 of cash and the
issuance of two subordinated promissory notes of $2,000,000 and $1,750,000,
respectively. The contingent payments will equal 15% of the excess of adjusted
income before tax over $2,000,000 per year for five years. The cost of these
acquisitions was allocated on the basis of the estimated fair value of the
assets acquired and the liabilities assumed. This allocation resulted
F-65
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
in goodwill of $6,966,000, noncompete agreements of $355,000 and trained
workforces of $50,000. The notes mentioned above are convertible into shares of
Common Stock.
During October 1996, the Company purchased the assets of an outpatient
ambulatory surgical center in Florida. The Company entered into a lease under
which the surgical center was leased to a partnership with an initial term of 15
years. In addition, the Company entered into a 20-year management agreement
pursuant to which the Company receives a management fee which is based upon the
performance of the surgical center. The purchase price for these assets was
$3,531,630 plus the assumption of debt of $1,223,625 which consisted of $717,557
in a mortgage payable and $506,068 in capital leases. The purchase price has
been allocated to the assets at their fair market value, including management
service agreements of $2,597,409. The resulting intangible is being amortized
over 20 years.
During April 1997, the Company acquired the business and certain assets of
a clinical research company in the Washington, D.C. area for $725,000 in the
form of a promissory note plus contingent consideration based on revenue and
profitability measures over the next five years. The contingent payments will
equal 10% of the excess gross revenue, as defined, provided the gross operating
margins of the acquired business exceed 30%. The purchase price was allocated to
goodwill and is being amortized over years. The note and contingent payments
are, in certain circumstances, convertible into shares of Common Stock.
During June 1997, the Company purchased the assets of two diagnostic
imaging centers in Dade County, Florida. The purchase price was approximately
$12,500,000 plus the assumption of debt and capital leases totaling $1,570,078.
Of such purchase price, $500,000 was paid in cash and the remaining $12,000,000
was paid by the issuance of 773,026 shares of Common Stock of the Company,
562,500 of which were issued in June and 210,526 of which were issued in
September. The purchase price was allocated to the assets at their fair market
value, including goodwill of $10,180,273. The resulting intangible is being
amortized over 30 years.
During June 1997, the Company acquired the remaining 20% interest in a
lithotripsy company that it purchased during 1994. The interest was acquired in
exchange for cash and 54,500 shares of Common Stock of the Company having a
total value of $2,005,000. The purchase price was allocated to goodwill and is
being amortized over 20 years.
During June 1997, the Company issued 100,002 shares of Common Stock of the
Company having a value of approximately $1,500,000 to the former shareholders of
Pinnacle Associates, Inc. ("Pinnacle"). The issuance of the shares represented
the merger consideration for Pinnacle which was purchased during 1995.
CSL Merger
Effective October 15, 1997, a subsidiary of the Company merged with CSL in
a transaction that was accounted for as a pooling of interests. The Company
exchanged 5,204,305 shares of its common stock for all of the outstanding common
stock of CSL. The Company's historical financial statements for all periods have
been restated to include the results of CSL.
The following table reflects the combined revenues, net income, net income
per share and weighted average number of shares outstanding for the respective
periods. The Pro forma Combined column adjusts the historical net income for CSL
to reflect the results of operations as if CSL had been a C corporation rather
than an S corporation for income tax purposes. The Adjusted Pro forma Combined
column adjusts the Pro Forma Combined column by eliminating certain
noncontinuing charges incurred by CSL. Provisions for income taxes have not been
reflected for the years ended December 31, 1994 and 1995 because there is no
taxable income on a combined basis.
F-66
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
<TABLE>
<CAPTION>
Adjusted
Pro forma Pro forma
PhyMatrix CSL Combined Combined
------------ ------------ ------------- ------------
For the six months ended July 31, 1997
---------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $145,646,752 $13,128,176 $158,774,928 $158,774,928
Net Income $ 8,196,216 $ 377,687 $ 8,573,903 $ 9,118,103
Net Income per weighted
average share $ 0.34 $ 0.07 $ 0.29 $ 0.31
Weighted average number of
shares outstanding 23,863,289 5,289,127 29,152,416 29,152,416
For the six months ended July 31, 1996
---------------------------------------------------------
Revenue $ 77,631,077 $ 7,031,545 $ 84,662,622 $ 84,662,622
Net Income $ 5,062,509 $ 391,675 $ 5,454,184 $ 5,965,984
Net income per weighted
average share $ 0.23 $ 0.07 $ 0.20 $ 0.22
Weighted average number of
shares outstanding 21,689,631 5,086,932 26,776,563 26,776,563
For the year ended January 31, 1997
---------------------------------------------------------
Revenue $189,960,735 $18,040,124 $208,000,859 $208,000,859
Net Income $ 12,056,531 $ 1,940,074 $ 13,996,605 $ 15,154,005
Net income per weighted
average share $ 0.54 $ 0.37 $ 0.51 $ 0.55
Weighted average number of
shares outstanding 22,511,448 5,191,625 27,703,073 27,703,073
For the year ended December 31, 1995
---------------------------------------------------------
Revenue $ 70,733,282 $13,351,843 $ 84,085,125 $ 84,085,125
Net Income $(11,024,915) $ 2,931,175 $ (8,093,740) $ (5,960,740)
For the year ended December 31, 1994
---------------------------------------------------------
Revenue $ 2,446,821 $ 4,921,285 $ 7,368,106 $ 7,368,106
Net Income $ (1,296,737) $ (98,702) $ (1,395,439) $ (473,439)
</TABLE>
F-67
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
The following items reflect the noncontinuing charges, referred to above,
incurred by CSL during the respective periods:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
----------------------------------------------- -------------------------------
December 31, December 31, December 31, June 30, July 31,
1994 1995 1996 1996 1997
----------- ------------ ------------ ------------ -----------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Salaries expense related to the $ - $ - $ 628,000 $ - $ -
equity interest granted to an
officer of CSL. During January
1997, the officer entered into an
employment agreement with no
provisions for sharing of profits
or proceeds.
Consulting fees based on a profit 120,000 433,000 314,000 145,000 -
sharing arrangement. The profit
sharing arrangement was
terminated during 1997.
Management fees paid to the 802,000 1,700,000 987,000 708,000 907,000
principal shareholders of CSL
--------- ----------- ---------- ------------ -----------
Total nonrecurring items 922,000 2,133,000 1,929,000 853,000 907,000
After tax impact of nonrecurring $ 922,000 $ 2,133,000 $1,157,400 $ 511,800 $ 544,200
items
</TABLE>
Prior to its merger with the Company, CSL reported on a fiscal year ending
December 31. Prior to its initial public offering during January 1996, the
Company reported on a fiscal year ending December 31. The fiscal year end of the
Company was changed to January beginning with the one month period ended January
31, 1996. The restated financial statements for the year ended January 31, 1997
are based on a combination of the Company's results for its January 31 fiscal
year and a December 31 fiscal year for CSL. CSL's historical results of
operations for the month ending January 31, 1997 are not included in the
Company's consolidated statements of operations or cash flows. An adjustment has
been made to stockholder's equity as of February 1, 1997 to adjust for the
effect of excluding CSL's results of operations for the month ending January 31,
1997.
As a result of using the pooling of interests method of accounting,
estimated transaction expenses of $10,150,000 will be recorded as a one-time
charge to the Company's statement of operations during the quarter ended October
31, 1997, which is the period in which the transaction closed. A summary of
these estimated expenses is as shown below:
<TABLE>
<CAPTION>
CSL PhyMatrix Total
---------- --------- ----------
<S> <C> <C> <C>
Legal $ 200,000 $300,000 $ 500,000
Accounting 200,000 175,000 375,000
Investment Banking 3,600,000 325,000 3,925,000
Other 250,000 100,000 350,000
---------- -------- -----------
Subtotal transaction expenses 4,250,000 900,000 5,150,000
---------- -------- -----------
CNS Consulting (1) 5,000,000 0 5,000,000
---------- -------- -----------
Total $9,250,000 $900,000 $10,150,000
---------- -------- -----------
</TABLE>
(1) Represents buyout of consulting contract.
F-68
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
Management Services Organizations and Contract Management Acquisitions
During December 1995, the Company obtained a 43.75% interest in Physicians
Choice Management, LLC, an MSO that provides management services to an IPA
composed of over 375 physicians based in Connecticut. The Company acquired this
interest in exchange for a payment of $1.5 million to the MSO's shareholders
($1.0 million paid during 1995 and $.5 million paid during the second quarter of
1996) and a capital contribution of $2.0 million to the MSO ($1.5 million paid
during 1995 and $.5 million paid during the second quarter of 1996). In
addition, upon the closing of the offering, the Company granted options to
purchase 300,000 shares of Common Stock to certain MSO employees in conjunction
with their employment agreements. These options vest over a two-year period with
the exercise price equaling the fair market value of the Company's stock on the
date such shares become exercisable. During September 1996, the Company acquired
the remaining 56.25% ownership interest in the MSO. The Company acquired the
remaining interests in exchange for a payment of $1,000,000 in cash plus 363,442
shares of Common Stock of the Company. The Company also committed to loan the
MSO's selling shareholders $2,800,000 to pay the tax liability related to the
sale. As of January 31, 1997 $2,253,000 of the loan amount committed had been
advanced to the selling shareholders by the Company. The total purchase price
for the 100% interest was approximately $12,148,822 and has been allocated to
these assets at their fair market value including goodwill of $12,099,111. The
resulting intangible is being amortized over 40 years.
During April 1996, the Company purchased a 50% interest in Central Georgia
Medical Management, LLC, an MSO that provides management services to an IPA
composed of 45 physicians based in Georgia. The Company acquired this interest
in exchange for a payment of $550,000 to existing shareholders and a capital
contribution of $700,000 to the MSO. The Company's balance sheet as of January
31, 1997 includes the 50% interest not owned by the Company as minority
interest. The owners of the other 50% interest in the MSO have a put option to
the Company to purchase their interests. This put option vests over a four year
period. The price to the Company to purchase these interests equals 40% of the
MSO's net operating income as of the most recent fiscal year multiplied by the
price earnings ratio of the Company. The minimum price earnings ratio used in
such calculation will be 4 and the maximum 10.
During September 1996, the Company purchased an 80% interest in New Jersey
Medical Management, LLC, an MSO that provides management services to an IPA with
more than 450 physicians in New Jersey. The Company acquired this interest in
exchange for a payment of $350,000 to existing shareholders. The Company's
balance sheet at January 31, 1997 includes the 20% interest not owned by the
Company as minority interest.
During September 1996, the Company purchased the stock of Physicians
Consultant and Management Corporation ("PCMC"), a company based in Florida that
provides the managed health care industry with assistance in provider relations,
utilization review and quality assurance. The base purchase price for the stock
was $2,000,000 with $1,000,000 paid on the closing date and $1,000,000 paid
during February 1997. There is also a contingent payment up to a maximum of
$10,000,000 based on PCMC's earnings before taxes during the next five years
which will be paid in cash and/or Common Stock of the Company. The purchase
price has been allocated to the assets at their fair market value including
goodwill of approximately $3,078,568. The resulting intangible is being
amortized over 30 years.
During November 1996, the Company established New York Network Management,
L.L.C. ("Network"), which is 51% owned by the Company, to purchase the assets
and stock of various entities which comprise Brooklyn Medical Systems ("BMS").
BMS arranges for the delivery of health care services to members through
affiliations with more than 600 physicians in the New York City area. The base
purchase price for Network was $1,200,000 and an additional payment not
exceeding $1,000,000 may be required to be made during the next three years if
certain pretax earnings thresholds are achieved. The Company has committed to
fund approximately $2,400,000 to Network during the next three years. Such
advances can be in the form of a demand loan or for additional ownership
interests if the other owners do not elect to contribute their pro-rata share of
any additional capital
F-69
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
contribution ($100,000 of additional capital contribution for an additional 1%
interest) in Network. During the first three years the Company has the option to
purchase up to an additional 29% ownership interest. During years four and five
the owners of 29% of Network have the right to require the Company to purchase
their interests at the option price.
During April 1997, the Company acquired a pulmonary physician network
company for a base purchase price of $2,966,058. Of such purchase price,
$673,211 was paid in cash and 180,717 shares of Common Stock of the Company were
issued during May 1997 having a value of $2,292,847. There is also a contingent
payment up to a maximum of $2,000,000 based on the acquired entities' earnings
before taxes during the next three years which will be paid in cash and/or
Common Stock of the Company. The purchase price was allocated to management
service agreements and is being amortized over 30 years.
Year Ended December 31, 1995 Acquisitions
Physician Practice Acquisitions
During the year ended December 31, 1995, the Company purchased the assets
of several physician practices and in conjunction with those purchases entered
into employment agreements with 14 physicians in Florida. The total purchase
price for these assets was $4,158,875. The purchase price was allocated to these
assets at their fair market value, including goodwill of $3,093,946. The
resulting goodwill is being amortized over 20 years.
During the year ended December 31, 1995, the Company purchased the assets
of and entered into management service agreements with Oncology-Hematology
Associates, P.A. and Oncology-Hematology Infusion Therapy, Inc.; Georgia Cancer
Specialists, Inc.; Osler Medical, Inc.; Oncology Radiation Associates, P.A.;
West Shore Urology; Whittle, Varnell and Bedoya, P.A.; Oncology Care Associates;
Venkat Mani; and Symington, consisting of an aggregate of 79 physicians
including 45 oncologists. The total purchase price for these assets was
$23,425,190 in cash. In connection with these acquisitions, the Company also
entered into a 15-year capital lease with a total obligation of $1,569,171 and
assumed debt of $6,893,609. The purchase price for the practices' assets was
allocated to assets at their fair market value, including management service
agreements of $18,814,763. The resulting intangible is being amortized over the
life of the management agreements which range from ten to 20 years.
Medical Support Services Companies Acquisitions
During March 1995, the Company acquired by merger all of the outstanding
shares of stock of Oncology Therapies, Inc. (formerly known as Radiation Care,
Inc. and referred to herein as "OTI") for $2.625 per share. OTI owns and
operates outpatient radiation therapy centers utilized in the treatment of
cancer and diagnostic imaging centers. The total purchase price for the stock
(not including transaction costs and 26,800 shares initially subject to
appraisal rights) was approximately $41,470,207. During April 1995, the Company
purchased from Aegis Health Systems, Inc. for $7,163,126 all of the assets used
in its lithotripsy services business. During November 1995 the Company acquired
by merger Pinnacle Associates, Inc. ("Pinnacle"), an Atlanta, Georgia infusion
therapy services company. The merger consideration in connection with the
Pinnacle merger was paid in June 1997. The purchase price for these acquisitions
was allocated to assets at their fair market value including goodwill of
$19,235,818. The resulting intangibles are being amortized over 20 to 40 years.
Medical Facility Development Acquisition
On May 31, 1995, Mr. Gosman, Chairman of the Board and Chief Executive
Officer of the Company purchased a 50% ownership interest in DASCO Development
Corporation and DASCO Development West, Inc. (collectively, "DASCO"), a medical
facility development services company providing such services to related and
unrelated third parties in connection with the development of medical malls,
health parks, and medical office buildings. The purchase price consisted of $5.2
million in cash and $4.6 million in notes, which were guaranteed
F-70
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
by Mr. Gosman. Upon the closing of the Company's initial public offering,
Messrs. Gosman, Sands and Rendina, the Company's principal promoters, and
certain management and founder stockholders exchanged their ownership interests
in DASCO for shares of Common Stock equal to a total of $55 million or 3,666,667
shares. The Company believes that its medical facility development services and
project finance strategy are a significant component of the Company's overall
business strategy. The historical book value of Messrs. Sands' and Rendina's
interest in DASCO is $22,735. The initial 50% purchase price was allocated to
assets at their fair market value, primarily goodwill of $9.8 million with the
exchange recorded at historical value. At December 31, 1995, the acquisition of
the 50% interest in DASCO was being accounted for using the equity method.
Period June 24, 1994 (inception) to December 31, 1994 Acquisitions
Medical Support Services Companies Acquisitions
During September 1994, an 80% owned subsidiary of the Company purchased
substantially all of the assets of Uromed Technologies, Inc. ("Uromed"), a
provider of lithotripsy services in Florida, for a purchase price of $3,141,535
plus the assumption of capital lease obligations of $1,097,614. The Company
acquired the outstanding 20% interest in the subsidiary during June 1997. During
November 1994, the Company purchased 80% of the stock of Nutrichem, Inc.
("Nutrichem"), an infusion therapy company doing business in Maryland, Virginia
and the District of Columbia, for $3,528,704 in cash and a contingent note in
the amount of $6,666,667, subject to adjustments. A charge of $1,271,000 related
to this contingent note was recorded during the year ended December 31, 1995.
The remaining $5,395,667 was allocated to goodwill at December 31, 1995 and is
being amortized. Subsequent to the offering, the Company acquired the
outstanding 20% interest in Nutrichem in exchange for 266,666 shares of Common
Stock resulting in additional purchase price of $4,000,000. During November
1994, the Company acquired all of the assets and assumed certain liabilities of
First Choice Health Care Services of Ft. Lauderdale, Inc., First Choice Health
Care Services, Inc. and First Choice Home Care Services of Boca Raton, Inc.,
home health care companies doing business in Florida, for a total purchase price
of $2,910,546 in cash plus the assumption of $225,000 in debt. The purchase
price for these acquisitions was allocated to assets at their fair market value,
including goodwill of $14,818,145. The resulting intangibles are being amortized
over 20 to 40 years.
During December 1994, the Company purchased a 36.8% partnership interest in
Mobile Lithotripter of Indiana Partners, a provider of lithotripsy services in
Indiana, from Mobile Lithotripter of Indiana, Limited, for $2,663,000 in cash.
This investment is being accounted for by the equity method.
The accompanying financial statements include the results of operations
derived from the entities purchased by the Company since the date of
acquisition. The following unaudited pro forma information presents the results
of operations of the Company for the years ended January 31, 1997 and December
31, 1995 as if the acquisition of the entities purchased through the year ended
January 31, 1997, had been consummated on February 1, 1996 and January 1, 1995.
Such unaudited pro forma information is based on the historical financial
information of the entities that have been purchased and does not include
operational or other changes which might have been effected pursuant to the
Company's management. The unaudited pro forma information also gives effect to
both the Company's January 1996 initial public offering and the Convertible
Subordinated Debenture Offering and the application of the net proceeds
therefrom, as if such transactions had occurred on January 1, 1995.
F-71
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
The unaudited pro forma information presented below is for illustrative
informational purposes only and is not necessarily indicative of results which
would have been achieved or results which may be achieved in the future (in
thousands except per share amounts):
Pro Forma
--------------------------
January 31, December 31,
1997 1995
(unaudited) (unaudited)
----------- ------------
Revenue............................................. $245,105 $193,622
Net income (loss)................................... 13,021 1,436
Net income (loss) per share......................... $0.45 $0.05
======== ========
Number of shares used in pro forma net income
(loss) per share calculation................... 28,752 28,752
======== ========
4. Notes Receivable
During April 1995, the Company funded a tax loan in the amount of
$1,029,600 at an interest rate of 7.75% to the former shareholders of Nutrichem
which was paid in full in January 1996.
During 1996, the Company loaned $10,000,000 to an unrelated healthcare
entity. The principal and interest were repaid during May 1997. Interest on the
loan accrued at the rate of prime plus 2%.
During 1996, the Company loaned $2,253,000 to the shareholders of
Physicians Choice, LLC pursuant to the agreement under which the Company
purchased the remaining ownership interests in Physicians Choice Management, LLC
(see Note 3). The note has a variable rate of interest and a final maturity in
April 2004.
During 1996, the Company loaned an aggregate of $2,685,700 to various
entities. The notes bear interest at rates ranging from the prime rate to the
prime rate plus 1% and have final maturities ranging from November 2001 to
October 2011. The notes are revolving loan agreements with a total commitment of
$3,750,000.
5. Property and Equipment
Property and equipment consists of the following:
Estimated January 31,
Useful Life ----------- December 31,
(Years) 1997 1995
----------- ----------- ------------
Land -- $ 2,714,948 --
Building 15-20 1,569,170 $ 7,852,653
Furniture and fixtures 5-7 10,515,074 5,567,810
Equipment 5-10 24,048,121 22,075,125
Automobiles 3-5 140,926 62,816
Computer software 5 981,696 950,346
Leasehold improvements 4-20 6,823,262 6,045,393
----------- ------------
F-72
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
Property and equipment, gross 46,793,197 42,554,143
Less accumulated depreciation (7,664,905) (2,820,052)
============= ==============
Property and equipment, net $ 39,128,292 $ 39,734,091
============= ==============
Depreciation expense was $4,217,481, $2,853,992, and $129,091,
respectively, for the years ended January 31, 1997, December 31, 1995 and
December 31, 1994.
Included in property and equipment at January 31, 1997 and December 31,
1995 are assets under capital leases of $3,730,819 and $9,693,145, respectively,
with accumulated depreciation of $1,113,070 and $926,879, respectively.
6. Investment in Affiliates
On December 31, 1994, the Company purchased a 36.8% interest in Mobile
Lithotripter of Indiana Partners, for $2,663,000. During August 1995, the
Company purchased a 46% interest in I Systems, Inc., for $180,000. I Systems,
Inc. is engaged in the business of claims processing and related services. The
Company has the option to purchase up to an additional 30% interest in I Systems
for $33,333 in cash for each additional one percent of ownership interest
purchased. During the year ended January 31, 1997, the Company increased its
ownership interest in I Systems by two percent. These investments are being
accounted for using the equity method at January 31, 1997. During May, 1995, Mr.
Gosman purchased a 50% interest in DASCO, a medical facility development
services company, for $9,610,000. Upon the completion of the offering, the
remaining 50% interest in DASCO was purchased and DASCO has been consolidated
subsequent to the offering.
F-73
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
7. Accrued and Other Current Liabilities
Accrued and other current liabilities consist of the following:
January 31, December 31,
1997 1995
-------------- ------------
Accrued closure costs $ 570,000 $ 570,000
Accrued rent 1,141,618 799,551
Accrued income taxes 1,991,368 --
Accrued professional fees 4,502,263 445,250
Accrued additional purchase price 1,000,000 --
Accrued offering costs -- 885,770
Accrued interest 991,977 738,317
Accrued bonus payments -- 4,718,564
Unearned revenue 1,513,669 1,940,180
Other 916,269 1,210,080
============== ============
Total accrued and other current
liabilities
$12,627,164 $11,307,712
============== ============
The accrued closure costs are primarily for the remaining lease obligation
for the closure of five radiation therapy centers acquired when the Company
purchased OTI during March 1995. $1,074,013 of accrued closure costs is
classified as a long-term liability at January 31, 1997. Closure costs in the
amount of $3,134,028 were accrued at December 31, 1995. $2,188,635 of such
accrual was recorded as an adjustment to the purchase price and $945,393 of such
accrual was recorded as a charge in 1995. In addition, the Company also recorded
a charge of $1,554,607 during 1995 which represented the writedown of assets to
their estimated fair market value.
F-74
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
8. Long-term Debt, Notes Payable and Capital Leases
Long-term debt, notes payable and capital leases consist of the following:
<TABLE>
<CAPTION>
January 31, December 31,
1997 1995
------ ---------
<S> <C> <C>
Convertible subordinated debentures, with an interest rate of 6.75%
and a maturity of June 15, 2003........................................ $ 100,000,000 $ --
Note payable due to four individuals payable in eight equal
semi-annual installments of $28,125, including interest at 8%
through November 1998.................................................. 84,375 140,625
Notes payable to a bank, with a maturity date of December 2001 and an
interest rate of 8.25%................................................. 85,111 --
Note payable to an individual, payable on demand including interest
at 9%.................................................................. 6,762 --
Related party note payable due to three individuals payable on demand
including interest at 10%. One of the notes for $30,000 is
collateralized by the cash and accounts receivable of Pinnacle......... -- 130,000
Note payable to a bank interest payable monthly at the prime rate
plus 2% (10.50% at January 31, 1996) with a maturity date of
April 1996............................................................. -- 201,422
Line of credit note payable to a bank, due and payable on demand,
interest at the prime rate (8.50% at January 31, 1996)................. -- 400,000
Note payable to a bank, collateralized by the assets of a
multispecialty group practice, payable in monthly installments
of $14,027, including interest at 7.50% and a final payment in
February 1999.......................................................... 322,675 472,181
Note payable to a bank, collateralized by the assets of a
multispecialty group practice, payable in monthly installments
of $20,608, at 8.75% and a final payment in August 2000................. 758,335 918,779
Convertible note payable to the former shareholders of a medical
practice in Pennsylvania, with a maturity date of May 1997 and
an interest rate of 9%. The Company has the option to make such payment
in either cash or Common Stock of the Company (see Note 3).............. 300,000 --
Mortgage note payable to a bank, collateralized by the assets of an
outpatient surgery center, payable in monthly installments of
$6,627.69 including interest at 8.86% and a final maturity of
November 2001.......................................................... 712,836 --
Note payable to a bank, payable in monthly installments, interest at
the prime rate plus .375% and a final maturity of June 1998............ 1,475,000 --
Note payable in two equal installments in April 1996 and 1997 (or
earlier upon a reorganization which includes an initial public
offering), including interest at 8%.................................... -- 3,567,408
Related party notes payable to the shareholders of DASCO, payable in
May 1996, including interest at 6.37%.................................. -- 4,610,588
Note payable to the former shareholders of a medical oncology practice in
South Florida, payable in ten equal semi-annual installments of
$682,867, which includes interest at 9%. The
note payable is collateralized by an irrevocable letter of
credit.................................................................. 4,504,184 5,403,337
Note payable to a financing institution with a maturity date of March 2000, a
final payment of $2,187,500, and an interest rate at the
prime rate plus 3% (11.50% at December 31, 1995)......................... -- 15,743,466
Note payable to NationsBank, with a maturity date of June 1996 and an interest
rate at the prime rate plus .375% (8.875% at December
31, 1995). This note payable was personally guaranteed by Mr.
Gosman................................................................... -- 19,500,000
Note payable to Mr. Gosman with a maturity date of January 1998 and
an interest rate at the prime rate (8.50% at December 31, 1995).......... -- 36,690,180
Revolving bank line of credit with a maturity date of September 1999
and an interest rate at 1/4 % above the bank's base rate
(7.86% at December 31, 1996)............................................. 3,132,300 --
Convertible acquisition notes payable with various maturity dates through
August 31, 2000 and an interest rate at 7%............................... 3,950,000 --
Acquisition earnouts payable with various maturity dates through
2001 ........................................... ........................ 221,025 --
------- ------
</TABLE>
F-75
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
<TABLE>
<S> <C> <C>
Other note payable with various maturity dates through 1999 8,203 10,953
----- ------
Capital lease obligations with maturity dates through
September 2015 and interest rates ranging from
8.75% to 12%................................................ 3,269,453 9,301,327
----------- ---------
118,830,259 97,090,266
Less current portion of capital leases.......................... (889,536) (798,598)
Less current portion of debt.................................... (2,946,033) (25,908,493)
Less current portion of related party debt...................... -- (4,740,588)
----------- ----------
Long-term debt and capital leases............................... $ 114,994,690 $ 65,642,587
=========== ==========
</TABLE>
The convertible acquisition notes payable are convertible into common stock
of the Company at the option of the note holders at a conversion price of
$16.425 per share.
The following is a schedule of future minimum principal payments of the
Company's long-term debt and the present value of the minimum lease commitments
at January 31, 1997:
<TABLE>
<CAPTION>
Capital
Debt Leases
---------- ----------
<S> <C> <C>
Through January 31, 1998....................................... $ 2,946,033 $ 1,201,559
Through January 31, 1999....................................... 5,780,479 734,934
Through January 31, 2000....................................... 2,460,724 431,886
Through January 31, 2001....................................... 1,586,276 390,203
Through January 31, 2002....................................... 2,787,295 253,490
Thereafter..................................................... 100,000,000 1,861,894
----------- ---------
Total.......................................................... 115,560,807 4,873,966
Less amounts representing interest and executory costs......... -- (1,604,514)
----------- ---------
Present value of minimum lease payments........................ 115,560,807 3,269,452
Less current portion........................................... (2,946,033) (889,536)
----------- ---------
Long-term portion.............................................. $ 112,614,774 $ 2,379,916
=========== =========
</TABLE>
9. Lease Commitments
The Company leases various office space and certain equipment pursuant to
operating lease agreements.
Future minimum lease commitments consisted of the following at January 31:
<TABLE>
<S> <C>
1998........................................................... $ 10,607,771
1999........................................................... 8,019,351
2000........................................................... 7,093,868
2001........................................................... 4,394,224
2002........................................................... 3,238,111
Thereafter..................................................... 5,831,463
----------
$39,184,788
==========
</TABLE>
10. Commitments and Contingencies
The Company is subject to legal proceedings in the ordinary course of its
business. While the Company cannot estimate the ultimate settlements, if any, it
does not believe that any such legal proceedings will have a material adverse
effect on the Company, its liquidity, financial position or results of
operations, although there can be no assurance to this effect.
The Company has entered into employment agreements with certain of its
employees, which include, among other terms, noncompetition provisions and
salary and benefits continuation.
F-76
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
The Company has committed to expend up to $1,500,000 per year for each of
three years to assist in the expansion activities of Osler Medical, Inc., a
22-physician multispecialty group practice it entered into a management
agreement with in September 1995.
During 1996, the Company purchased the stock of a company based in Florida
that provides the managed health care industry with assistance in provider
relations, utilization review and quality assurance. In conjunction with this
acquisition, the Company may be required to make a contingent payment up to a
maximum of $10 million based on the acquired company's earnings before taxes
during the next five years. The payment, if required, shall be paid in cash
and/or Common Stock of the Company.
In conjunction with the acquisition of Physicians Choice Management, LLC,
the Company has committed to loan the selling shareholders $2.8 million to pay
the tax liability related to the sale. As of January 31, 1997, $2.3 million of
the loan amount committed had been advanced to the selling shareholders by the
Company.
During the year ended January 31, 1997 the Company loaned an aggregate of
$2,685,700 to various entities. The notes are revolving loan agreements with a
total commitment of $3,750,000.
In conjunction with certain of its acquisitions, the Company has agreed to
make payments in shares of Common Stock of the Company which are generally
issued one year from the closing date of such acquisitions with the number of
shares generally determined based upon the average price of the stock during the
five business days prior to the date of issuance. As of January 31, 1997 the
Company had committed to issue $11.1 million of Common Stock of the Company
using the methodology discussed above.
CSL has a profit-sharing agreement with a consultant to the Company. Such
agreement provides for payments to be made to the individual based on 10% of
income of the sites in existence at June 15, 1996, before taxes and certain
management fees paid to officers of CSL, for the year. Amounts charged to
expenses related to such agreements totaled approximately $314,000, $433,000 and
$120,000 for the year ended January 31, 1997 and the years ended December 31,
1995 and 1994, respectively. The profit sharing arrangement was terminated
simultaneous with the closing of the CLS merger during October 1997.
A subsidiary of the Company, OTI, (formerly Radiation Care, Inc., "RCI") is
subject to the litigation described below which related to events prior to the
Company's operation of RCI, and the Company has agreed to indemnify and defend
certain defendants in the litigation who were former directors and officers of
RCI subject to certain conditions. The Company has accrued the estimated costs
to defend and settle this litigation in purchase accounting.
In December, 1994, prior to its merger with the Company in March 1995, RCI
entered into a settlement agreement with the federal government arising out of
claims under the fraud-and-abuse provisions of the Medicare law. Under the
settlement agreement, RCI, without admitting that it violated the law, consented
to a civil judgment providing for its payment of $2 million and the entry of an
injunction against violations of such provisions.
On February 16, 1995, six former stockholders of RCI filed a consolidated
amended Class Action Complaint in Delaware Chancery Court (In re Radiation Care,
Inc. Shareholders Litigation, Consolidated C.A. No. 13805) against RCI, Thomas
Haire, Gerald King, Charles McKay, Abraham Gosman, Oncology Therapies of
America, Inc. ("OTA") and A.M.A. Financial Corporation, ("AMA") alleging that
the RCI stockholders should have received greater consideration for their RCI
stock when RCI was merged with the Company. Plaintiffs allege breaches of
fiduciary duty by the former RCI directors, as well as aiding and abetting of
such fiduciary duty breaches by Mr. Gosman, OTA and AMA. Plaintiffs seek
compensatory or rescissionary damages of an undisclosed amount on behalf of all
RCI stockholders, together with an award of the costs and attorneys' fees
associated with the action. No class has been certified in this litigation. On
May 17, 1996, the Company filed an Answer denying any liability of any defendant
in connection with this litigation. All discovery in the Delaware
F-77
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
action, except for expert and class certification related discovery, is now
complete. On January 10, 1997, the Company filed a Motion for Summary Judgment
seeking dismissal of all plaintiffs' claims. An agreement in principal was
reached in May to settle the case, subject to court and class approval, and
definitive settlement documents are being prepared.
On August 4, 1995, 26 former stockholders of RCI filed a Complaint for
Money Damages against Richard D'Amico, Ted Crowley, Thomas Haire, Gerald King,
Charles McKay and Randy Walker (all former RCI officers and/or directors) in the
Superior Court of Fulton County, in the State of Georgia (Southeastern Capital
Resources, L.L.C. et al. v. Richard D'Amico et al., Civil Action No. E41225).
Early on in the litigation two of the plaintiffs withdrew from the litigation,
and during the deposition phase of the case, two more plaintiffs dropped out.
However, plaintiffs added four additional plaintiffs with the filing of an
Amended Complaint on November 27, 1995. Plaintiffs allege a breach of fiduciary
duty by the former RCI directors Haire, King and McKay, a conspiracy by the RCI
officer defendants D'Amico, Crowley and Walker, and negligence by all
defendants. Plaintiffs seek additional consideration for their shares of RCI
Common Stock in the form of compensatory and monetary damages in the amount of
$5.7 million, plus punitive damages, interest, costs and attorneys fees. On
September 22, 1995, the defendants filed an Answer denying any liability in
connection with this litigation. On October 23, 1995, the defendants filed a
motion to stay the action pending resolution of the Delaware class action. The
Court denied the Motion on April 16, 1996. All discovery in the case was
completed as of September 13, 1996. The Defendants moved for summary judgment on
September 20, 1996. The plaintiffs filed an opposition on November 18, 1996.
Defendants filed a Reply brief on February 27, 1997. The Company is not a party
to this litigation and its exposure is limited to its obligation under its
by-laws to indemnify the former officers and directors of RCI to the fullest
extent permitted by Delaware law. In May, an agreement in principal was reached
to settle the case subject to a number of corrections not yet satisfied.
Definitive settlement documents are being prepared.
11. Related Party Transactions
For the years ended December 31, 1995 and 1994, Continuum Care of
Massachusetts, Inc., whose principal shareholder is Mr. Gosman, provided
management services to the Company. Fees for these services in the amount of
$3,729,680 and $1,629,753, respectively, have been included in the financial
statements and consist of the following:
December 31,
-------------------------
1995 1994
---------- ----------
Salaries, wages and benefits.................... $2,267,891 $ 934,200
Professional fees............................... 273,941 253,955
Rent............................................ 459,732 192,242
Other........................................... 728,116 249,316
--------- ---------
$3,729,680 $1,629,713
========= =========
Such fees were based on the discretion of Continuum Care of Massachusetts,
Inc., and may not have been indicative of what they would have been if the
Company had performed these services internally or had contracted for such
services with unaffiliated entities. Included in rent was rent expense of
approximately $415,000 and $156,000 for the years ended December 31, 1995 and
1994, respectively, for the Company's principal office space in West Palm Beach,
Florida. The lessee of the office space prior to the offering was Continuum Care
of Massachusetts, Inc. The current lease term expires January 31, 2000.
The Company assumed the lease from Continuum Care of Massachusetts, Inc.
upon the consummation of the offering.
In connection with the purchase of Nutrichem during November 1994, the
Company was required to make contingent note payments in the amount of
$4,444,444 which had been accrued at December 31, 1995. Payments
F-78
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
on the contingent note are based on attaining certain earnings thresholds. A
charge of $1,271,000 related to this contingent note was recorded during 1995.
The $4,444,444 which had been accrued represented the maximum remaining amount
because the earnings threshold upon which the payment is based was reached
during 1995. The contingent note was personally guaranteed by Mr. Gosman. The
contingent note was paid in full during January 1996 with the proceeds from the
offering.
During March 1995, the Company incurred a $17,500,000 note payable to a
financing institution in connection with the purchase of OTI. Mr. Gosman
personally guaranteed a portion of the $17,500,000. Mr. Gosman's liability under
the guarantee was limited to no more than $6,125,000. The note was paid in full
during January 1996 with the proceeds from the offering.
During May 1995, Mr. Gosman incurred $4,610,588 of debt payable, which has
been included in these financial statements, to the shareholders of DASCO in
connection with the purchase of 50% of the outstanding stock of DASCO. The notes
bear interest at 6.37% per annum and were repaid during 1996.
Meditrust, a publicly traded real estate investment trust with assets in
excess of $2.4 billion of which Mr. Gosman is the Chairman of the Board and
Chief Executive Officer, has provided construction financing to customers of
DASCO in the aggregate amount of $176,000,000 for 19 facilities developed by
DASCO.
DASCO provides development and other services in connection with the
establishment of health parks, medical malls and medical office buildings. DASCO
provides these services to or for the benefit of the owners of the new
facilities, which owners are either corporations or limited partnerships. Mr.
Sands and Mr. Rendina have obtained equity interests in the entities which own
26 of the 29 facilities developed by DASCO. The collective interests of Messrs.
Sands and Rendina range from 17% to 100%. In addition, Mr. Gosman individually
and as trustee for his two sons and Frederick R. Leathers, Robert A. Miller,
William A. Sanger, and Edward E. Goldman have obtained limited partnership
interests ranging from 14% to 36% in the entities which own 11 facilities being
developed by the Company through DASCO. During the year ended January 31, 1997,
DASCO recorded revenues in the amount of $9,986,790 related to facilities
developed by DASCO in which equity interests have been obtained by related
parties.
The Company provides construction management, development marketing and
consulting services to entities principally owned by Mr. Gosman in connection
with the development and operation by such entities of several medical
facilities. During the year ended January 31, 1997, the Company recorded
revenues in the amount of $7,047,611 related to such services. The Company
provides these services to affiliated parties on terms no less favorable to the
Company than those provided to unaffiliated parties.
The Company was required to assume an unfavorable lease in one of its
acquisitions. The Company planned to dispose of the lease and accrued $559,000
in purchase accounting which represents the difference between the unfavorable
lease costs and the estimated fair market value rent. The Company assigned the
lease in January 1997 to an entity principally owned by Mr. Gosman.
Included in operating expenses are discretionary management fees paid or
accrued to the principal shareholders of CSL for management-related services.
Approximately $987,000, $1,700,000 and $802,000 of such management fees were
incurred for the years ended January 31, 1997, December 31, 1995 and December
31, 1994, respectively, and are included in operating expenses.
A key officer of CSL entered into an employment agreement with CSL, dated
January 1995, which entitled him to additional compensation of 5.5% of annual
net profits and, in the event of an IPO or sale of CSL, 5% of the proceeds from
any such transaction. In June 1996, the principal shareholders in CSL decided to
formalize their arrangement with this officer as to his equity participation in
the business. To effect this decision, the employee was granted a 15% equity
interest in CML, which was merged into CSL effective January 1, 1997. Based on
an independent appraisal, the Company valued the transaction at $627,640 and
recorded the amount as a 1996 operating expense. On January 1, 1997, the officer
entered into a new employment agreement with CSL, with no
F-79
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
provisions as to the sharing of profits, or proceeds, in the event of an IPO or
sale of CSL.
At December 31, 1995, the Company had borrowed $36,690,180 from Mr. Gosman.
Interest on such outstanding indebtedness at the prime rate of interest during
the year ended December 31, 1995 was $1,708,174. During January 1996, the
Company repaid Mr. Gosman $28,676,743 of such advances with the proceeds of the
offering.
During July 1995, the Company purchased the assets of and entered into a
15-year management agreement with a medical oncology practice with three medical
oncologists. An affiliate of the Company, Continuum Care of Massachusetts, Inc.,
guarantees the performance of the Company's obligations under the management
agreement.
During September 1995, the Company provided a letter of credit in the
amount of $5,403,337 to a seller in connection with entering into a management
agreement and purchasing the assets of a medical oncology practice. Cash
collateralizing the letter of credit, which has a balance of $4,504,184 at
January 31, 1997, is included in other long-term assets on the balance sheet.
Prior to the completion of the offering, the collateral for the letter of credit
was provided by Mr. Gosman.
During September 1995, the Company refinanced $19,500,000 of an amount owed
to Mr. Gosman with NationsBank. The $19,500,000 amount refinanced with
NationsBank and outstanding at December 31, 1995 was personally guaranteed by
Mr. Gosman. The $19,500,000 was paid in full during January 1996 with the
proceeds of the offering.
During November 1995, the Company assumed $180,000 of notes payable to four
former shareholders of Pinnacle when the Company merged with Pinnacle. One of
these notes for $50,000 was repaid during December 1995 and the remainder were
repaid during 1996.
12. Disclosures about Fair Value of Financial Instruments
The methods and assumptions used to estimate the fair value of each class
of financial instruments, for which it is practicable to estimate that value,
and the estimated fair values of the financial instruments are as follows:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short effective
maturity of these instruments.
Long-term Debt
The fair value of the Company's long-term debt and capital leases is
estimated based on the quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the same remaining
maturities. The carrying amount and fair value of long-term debt and capital
leases, including current maturities and related party debt, at January 31, 1997
and December 31, 1995 is $118,830,259 and $97,090,266, respectively.
13. Employee Benefit Plan
The Company sponsors 401(k) plans, covering substantially all of its
employees. Contributions under the primary 401(k) plan equal 50% of the
participants' contributions up to a maximum of $400 per participant per year.
For the employees of CSL, the Company allows eligible employees to
contribute up to 15% of their compensation and the Company may match up to 20%
of the employees first 5% of covered compensation.
14. Income Taxes
The financial statements of the Company for the periods prior to the
offering do not include a provision for income taxes because the taxable income
of the various entities that comprise the Company were either included in
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<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
the tax return of the Partnership's partners and former Subchapter S
corporation's shareholders, or the entities generated significant losses.
The Company became subject to federal and state income taxes effective the
date of the Company's initial public offering. Significant components of the
Company's provision for income taxes for the year ended January 31, 1997:
1997
--------
Federal:
Current.............................................. $ 4,305,329
Deferred............................................. 1,084,693
------------
Total federal.............................. 5,390,022
------------
State:
Current.............................................. 1,176,555
Deferred............................................. 269,489
------------
Total state................................ 1,446,044
------------
Totals............................................... $ 6,836,066
============
Significant components of the Company's deferred tax assets and liabilities
as of January 31,1997 are as follows:
1997
--------
Deferred tax asset
Allowance for doubtful accounts,
reserves and other accrued expenses............. $ 1,493,180
Net operating loss........................................ 13,226,228
----------
Total deferred tax assets............... 14,719,408
----------
Deferred tax liability
Property and depreciation................................. (856,173)
Amortization.............................................. (647,902)
Other..................................................... (318,165)
----------
Total deferred tax liability............ (1,822,240)
----------
Deferred tax asset (liability)............................ 12,897,168
----------
Valuation allowance....................................... (14,251,349)
==========
Net deferred tax asset (liability)........................ $ (1,354,181)
==========
The Company reasonably believes that, because of limitations imposed by the
Internal Revenue Code, net operating losses of $33,065,570 and other deferred
tax assets, which arise out of OTI, will not be recognized in future years.
Accordingly, the Company has established a full valuation allowance for these
deferred tax assets.
The net operating losses of $33,065,570 will begin to expire in 2005.
F-81
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
The reconciliation of income tax computed at statutory rates to income tax
expense is as follows:
1997
----
Statutory rate................................................. 35%
Permanent differences.......................................... 1%
State income tax (net of federal
benefit)............................................. 5%
Valuation allowance............................................ (7%)
Other.......................................................... 2%
---
36%
===
15. Supplemental Cash Flow Information
During the year ended January 31, 1997 and the year ended December 31,
1995, the Company acquired the assets and assumed certain liabilities of various
entities. The transactions had the following non-cash impact on the balance
sheets:
January 31, December 31,
1997 1995
-------------- -------------
Current assets $ 4,692,389 $ 12,463,007
Property, plant and equipment 4,693,603 40,817,404
Intangibles 56,964,439 43,155,934
Other noncurrent assets 25,541 2,197,691
Current liabilities (9,667,604) (8,174,988)
Debt (7,360,320) (43,179,672)
Noncurrent liabilities (11,603,513) (2,913,635)
Equity (10,010,325) -
============== =============
Net cash used for acquisitions $ 27,734,210 $ 44,365,741
============== =============
During the year ended January 31, 1997, the Company purchased $643,500 of
equipment under capital leases. In addition, cash paid for interest during the
year ended January 31,1997 and the year ended December 31, 1995 was $5,571,800
and $2,772,082, respectively. Income taxes paid for the year ended January 31,
1997 were $3,320,241. There was no interest paid for the year ended December 31,
1994 and there were no income taxes paid for the years ended December 31, 1995
and 1994.
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<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
16. Stock Option Plan
The Company has adopted a stock option plan and authorized the issuance of
4,100,000 shares of the Company's Common Stock to key employees and directors of
the Company. Under this plan, the exercise provision and price of the options
will be established on an individual basis generally with the exercise price of
the options being not less than the market price of the underlying stock at the
date of grant. The options generally will become exercisable beginning in the
first year after grant in 20% -- 33% increments per year and expire ten years
after the date of grant. Information related to the stock option plan is
summarized as follows:
Year Ended Year Ended
January 31,1997 December 31, 1995
------------------------ ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ----------- --------- ---------
Outstanding, beginning of 1,200,500 $ 14.49 127,500 $ 4.00
period
Options granted:
At fair market value 1,122,500 20.35 445,000 13.65
Above fair market value 108,914 3.13 -- --
(CSL options - see
below)
Options exercised (52,166) 6.97 -- --
Options canceled (23,334) 18.14 -- --
========== ======== ========== =======
Outstanding, end of period 2,356,414 16.85 572,500 $ 10.93
========== ======== ========== =======
Weighted average fair
value of options $9.27 $6.67
granted during the year ======== =======
At January 31, 1997 and December 31, 1995 options for 614,977 and 47,500,
respectively were exercisable.
Significant option groups outstanding at January 31, 1997 and related
weighted average price and life are as follows:
Options Outstanding Options Exercisable
- ------------------------------------------------------ -----------------------
Shares Shares
Outstanding Weighted Exercisable Weighted
at Remaining Average at Average
Range of January 31, Contractual Exercise January 31, Exercise
Exercise Price 1997 Life Price 1997 Price
- ---------------- ------------ ----------- --------- ------------ ---------
$3.00 - $5.00 230,914 8.3 $ 3.63 81,893 $ 3.78
$14.38 - $18.75 1,315,500 9.0 16.87 348,084 16.85
$19.00 - $24.75 810,000 9.5 20.72 185,000 20.45
The fair value of each option grant is estimated on the date of grant using
the Black-Sholes option-pricing model with the following weighted average
assumptions for grants in the year ended January 31, 1997, the one month ended
January 31, 1996, and the year ended December 31, 1995: expected volatility
(post-offering) of 56%, risk free interest rates of 6.4%, expected life of 4.5
years, and expected dividends of $0.
Options which were assumed in connection with CSL employees during 1996
were valued using the minimum value method, which is appropriate for nonpublic
companies, assuming a ten year option life, 5.5% risk free
F-83
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
interest rate, and no volatility. These options were granted with an exercise
price significantly greater than the market value of the company and accordingly
had a fair market value and associated expense of zero. Former CSL options have
been converted to 108,914 of the Company's options with an exercise price of
$3.13 and are included above.
The Company continues to account for stock based compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", as allowed by SFAS No. 123. Accordingly, no compensation cost has
been recognized for options granted. Had compensation for those plans been
determined based on the fair value at the grant date for awards during the year
ended January 31, 1997, the month ended January 31, 1996 and the year ended
December 31, 1995 consistent with SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the following pro forma amounts:
Year Ended Year Ended
January 31, December 31,
1997 1995
-------- ---------
Net income (loss)
As reported................................. $ 15,290 $ (8,094)
Pro forma................................... 12,880 (8,142)
Earnings (loss) per common share
As reported................................. $ 0.55 --
Pro forma................................... 0.46 --
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
17. Net Income Per Share
Net income per common share is based upon the weighted average number of
common shares outstanding (including stock required to be issued in the future
pursuant to acquisition agreements) during the period. For the years ended
January 31, 1997, the weighted average number of common shares outstanding were
27,703,073. When dilutive, stock options (less the number of treasure shares
assumed to be purchased from the proceeds) are included in the calculation of
the weighted average number of common shares outstanding. For the year ended
January 31, 1997, conversion of the 6 3/4% Convertible Subordinated Debentures
issued in June 1996, is not assumed because the effect is anti-dilutive.
18. Ratio of Earnings to Fixed Charges
For the years ended January 31, 1997, December 31, 1995 and December 31,
1994, the ratio of earnings to fixed charges was less than 1.0X, less than 1.0X
and 3.46, respectively. For purposes of computing the ratio of earnings to fixed
charges, earnings represent income from operations before minority interest and
income taxes, plus fixed charges. Earnings also includes the equity in
less-than-fifty-percent-owned investees only to the extent of distributions.
Fixed charges include interest, amortization of financing costs and the portion
of operating rental expense which management believes is representative of the
interest component of the rental expense. For the years ended December 31, 1995
and 1994 for purposes of computing the ratio of earnings to fixed charges, the
Company had earnings deficiencies of $1.0 million and $1.1 million,
respectively.
F-84
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
19. Segment Information (Unaudited)
The Company derives revenues from health care services and medical facility
development services. The Company commenced operations of the medical facility
development segment with the purchase of DASCO upon the completion of the
offering in January 1996. The activities related to the health care services and
medical facility development services segment are as follows (dollars in
thousands):
Medical
Facility
Health Care Development
Year ended January 31, 1997 Services Services Total
------------------------------- ---------- ----------- ---------
Net revenues............................ $ 188,952 $ 19,049 $ 208,001
Operating income........................ 12,719 11,133 23,852
Identifiable assets..................... 294,309 19,001 313,310
Depreciation & amortization............. 7,094 288 7,382
Capital expenditures.................... 3,246 2,440 5,686
20. Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly results of operations
for the periods shown:
(Dollars in thousands, except per share data)
Year Ended January 31, 1997
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Net revenues................. $ 40,459 $ 44,204 $ 55,438 $67,901
Income before income taxes... 4,164 4,583 5,713 7,667
Net income................... 2,760 2,955 3,827 5,749
Net income per share......... $0.10 $0.11 $0.14 $0.20
Year Ended December 31, 1995
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- -------
Net revenues................. $ 8,897 $ 16,184 $ 23,822 $35,182
Loss before income taxes..... (2,373)(A) (1,399) (1,031)(B) (3,291)(C)
Net loss(D).................. (2,373)(A) (1,399) (1,031)(B) (3,291)(C)
- ---------------
(A) Includes $1,111 nonrecurring earn-out payment.
(B) Includes $160 nonrecurring earn-out payment.
(C) Includes $2,500 provision for closure costs.
(D) Provisions for income taxes have not been reflected in the year ended
December 31, 1995 because there is no taxable income on a combined basis.
21. Subsequent Events
During August 1997, the Company purchased certain assets of, and entered
into a 20-year administrative services agreement with BAB Nuclear Radiology,
P.C., to operate five diagnostic imaging centers on Long Island, New York. The
purchase price was approximately $10,000,000 in cash, plus $15,000,000 in
convertible notes.
F-85
<PAGE>
PHYMATRIX CORP.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS (Continued)
(Information with respect to the six months ended
July 31, 1997 and 1996 is unaudited)
During September 1997, the Company entered into a secured credit agreement
with a bank providing for a $100 million revolving line of credit for working
capital and acquisition purposes. The credit agreement (i) prohibits the payment
of dividends by the Company, (ii) limits the Company's ability to incur
indebtedness and make acquisitions except as permitted under the credit
agreement, and (iii) requires the Company to comply with certain financial
covenants.
F-86
<PAGE>
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
The Company is a multispecialty physician practice management company that
provides management services to the medical community. The Company also develops
medical malls, medical office buildings, and health parks, both for its own
account and for leading hospitals and health systems. The Company's primary
strategy is to develop management networks in specific geographic locations by
affiliating with physicians, medical providers and medical networks. The Company
affiliates with physicians by acquiring their practices and entering into
long-term management agreements with the acquired practices and by managing
independent physician associations ("IPAs") and specialty care physician
networks through management service organizations ("MSOs") in which the Company
has ownership interests. Where appropriate, the Company supports its affiliated
physicians with related diagnostic and therapeutic medical support services. The
Company's medical support services include radiation therapy, diagnostic
imaging, infusion therapy, home health care, lithotripsy services, ambulatory
surgery and clinical research studies. Since its first acquisition in September
1994, the Company has acquired the practices of and entered into long-term
agreements to affiliate with approximately 360 physicians; has obtained
interests in MSOs in Connecticut, Georgia, New Jersey, New York and Florida that
provide management services to IPAs composed of over 3,600 multispecialty
physicians; purchased a company that provides contract management services to
approximately 2,500 physicians in specialty care networks; purchased CSL, a site
management organization conducting clinical research for pharmaceutical
companies and clinical research organizations at 22 centers located in 11
states; and acquired several medical support services companies and a medical
facility development company.
In January 1996, the Company changed its fiscal year end from December 31
to January 31.
Year Ended January 31, 1997 and the Six Months Ended July 31, 1997 Acquisitions
Physician Practice Acquisitions
Between April and June 1996, the Company purchased the assets of and
entered into employment agreements with Drs. Lawler, Cutler and Surowitz. The
total purchase price for these assets was $2,154,999 in cash and 69,799 shares
of Common Stock of the Company were issued during July 1997 having a value of
$1,058,400. The value of the Common Stock issued had been recorded in other
long-term liabilities at January 31, 1997. The purchase price has been allocated
to the assets at their fair market value including goodwill of $2,862,035. The
resulting goodwill is being amortized over 20 years.
During May 1996, the Company purchased the stock of Atlanta
Gastroenterology Associates, P.C. pursuant to a tax free merger and entered into
a 40-year management agreement with the medical practice in exchange for 324,252
shares of Common Stock of the Company having a value of approximately
$6,100,000. The transaction has been accounted for using the
pooling-of-interests method of accounting.
During May 1996, the Company amended its existing management agreement with
Oncology Care Associates and extended the term of the agreement to 20 years.
Simultaneously, the Company expanded the Oncology Care Associates practice by
adding three oncologists whose practices the Company acquired for $609,124.
$309,124 of such purchase price was paid in cash and 20,684 shares of Common
Stock of the Company were issued in July 1997 having a value of $300,000. The
purchase price has been allocated to the assets at their fair market value,
including management service agreements of approximately $609,124. The resulting
intangible is being amortized over 20 years.
During May and June 1996, the Company entered into agreements to purchase
the assets of and entered into 20-year management agreements with two physician
practices consisting of three physicians. These practices are located in South
Florida and Washington, D.C. The total purchase price for the assets of these
practices was $1,214,291. Of this amount, $663,667 was paid in cash and 29,350
shares of Common Stock of the Company were
F-87
<PAGE>
issued during May and June 1997 having a value of $550,954. The value of the
Common Stock issued had been recorded in other long-term liabilities at January
31, 1997. The purchase price has been allocated to the assets at their fair
market value, including management service agreements of $749,646. The resulting
intangible is being amortized over 20 years.
During July 1996, the Company purchased the assets of and entered into a
20-year management agreement with four physicians in Florida. The purchase price
for these assets was approximately $948,610, which was paid in cash. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $328,838. The resulting intangible is
being amortized over 20 years.
During July 1996, the Company purchased the assets of and entered into a
20-year management agreement with three urologists in Atlanta, Georgia. The
purchase price for these assets was $755,163. Of such purchase price, $475,163
was paid in cash and 18,046 shares of Common Stock of the Company were issued
during July 1997 having a value of $280,000. The value of the Common Stock
issued had been recorded in other long-term liabilities at January 31, 1997. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of approximately $399,974. The resulting
intangible is being amortized over 20 years.
During August 1996, the Company purchased the assets of and entered into a
management agreement with Atlantic Pediatrics. The purchase price for these
assets was $412,539. Simultaneous with the closing, Atlantic Pediatrics was
merged into Osler Medical, Inc. During the second quarter of 1996, the Company
also acquired certain copyright and trademark interests for a purchase price of
$887,000. The total purchase price for the assets acquired was allocated to such
assets at their fair market value, including management service agreements of
$1,215,074. The resulting intangible is being amortized over 20 years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with eight physicians in Florida. The purchase
price for these assets was $3,439,331. Of such purchase price, $1,519,331 was
paid in cash and 122,841 shares of Common Stock of the Company were issued
during August 1997 having a value of $1,920,000. The value of the Common Stock
issued had been recorded in other long-term liabilities at January 31, 1997. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $2,625,699. The resulting intangible
is being amortized over 40 years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with four physicians in Georgia. The purchase price
for these assets was $1,548,756. Of such purchase price, $855,956 was paid in
cash and 44,126 shares of Common Stock of the Company were issued during August
1997 having a value of $692,800. The value of the Common Stock issued had been
recorded in other long-term liabilities at January 31, 1997. The purchase price
has been allocated to these assets at their fair market value, including
management service agreements of $1,116,259. The resulting intangible is being
amortized over 40 years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with 10 physicians in Florida. The purchase price
for these assets was $3,294,499. Of such purchase price, $920,099 was paid in
cash and 192,649 shares of Common Stock of the Company were issued during
September 1997 having a value of $2,374,400. The value of the Common Stock
issued had been recorded in other long-term liabilities at January 31, 1997. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $3,161,192. The resulting intangible
is being amortized over 40 years.
During October 1996, the Company purchased the assets of and entered into
20-year management agreements with five physicians in Florida. The purchase
price for these assets was $1,341,521. Of such purchase price $806,521 was paid
in cash and 33,331 shares of Common Stock of the Company were issued during
October 1997 having a value of $535,000. The value of the Common Stock issued
had been recorded in other long-term liabilities at January 31, 1997. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $670,000. The resulting intangible is
being amortized over 20 years.
F-88
<PAGE>
During January 1997, the Company purchased the stock of Atlanta Specialists
in Gastroenterology pursuant to a merger and entered into a 40-year management
agreement with the medical practice in exchange for 108,393 shares of Common
Stock of the Company having a value of approximately $1,578,205. The transaction
was accounted for using the pooling-of-interests method of accounting.
During January 1997, the Company purchased the assets of and entered into a
40-year management agreement with 14 physicians in Texas. The purchase price for
these assets was $6,029,272. Of such purchase price, $2,333,272 was paid in cash
and $3,696,000 is payable during January 1998 in Common Stock of the Company
with such number of shares to be purchased based upon the average price of the
stock during the five business days prior to the issuance. The value of the
Common Stock to be issued has been recorded in other long-term liabilities at
January 31, 1997. The purchase price has been allocated to these assets at their
fair market value, including management service agreements of $4,640,493. The
resulting intangible is being amortized over 40 years.
During January 1997, the Company purchased the assets of and entered into a
40-year management agreement with 18 physicians in Florida. The purchase price
for these assets was $4,500,652. Of such purchase price, $2,273,613 was paid in
cash, $1,500,000 of bank debt was assumed and 42,830 shares of Common Stock were
issued having a value of $727,039. The purchase price has been allocated to
these assets at their fair market value, including management service agreements
of $3,814,400. The resulting intangible is being amortized over 40 years.
During February 1997, the Company purchased the stock of a six physician
practice pursuant to a merger and entered into a 40-year management agreement
with the practice in exchange for 159,312 shares of Common Stock of the Company
having a value of approximately $2,440,000. The transaction has been accounted
for using the pooling-of-interests method of accounting.
During February 1997, the Company purchased the assets of and entered into
a 40-year management agreement with five physicians in Utah. The purchase price
was $2,498,148. Of such purchase price, $1,378,148 was paid in cash and 75,293
shares of Common Stock of the Company were issued having a value of $1,120,000.
The purchase price was allocated to the assets at their fair market value,
including management service agreements of $1,499,013. The resulting intangible
is being amortized over 40 years.
During May 1997, the Company entered into a 40-year management agreement
with a radiation therapy center in Westchester, New York. The purchase price was
$2,550,000. Of such purchase price $1,200,000 was paid in cash and $1,350,000 is
payable during May 1998 in Common Stock of the Company with such number of
shares to be issued based upon the average price of the stock during the five
business days prior to the issuance. The value of the Common Stock to be issued
has been recorded in other long-term liabilities at July 31, 1997. The purchase
price has been allocated to management service agreements and is being amortized
over 40 years.
During July 1997, the Company entered into a management services agreement
with Beth Israel Hospital to manage its DOCS Division which consists of more
than 100 physicians located throughout the greater Metropolitan New York area.
In addition, the Company and Beth Israel Hospital will be completing the
formation of an MSO to manage the medical risk contracting to the more than
2,000 physicians affiliated with Beth Israel Hospital and its parent
corporation. The Management Services Agreement became effective July 1, 1997,
and will remain in effect for 40 years contingent upon the closing of the MSO
joint venture prior to January 15, 1998. The Company has committed up to $40
million in conjunction with the transaction to be utilized for the expansion of
the Beth Israel delivery system throughout the New York region. In connection
with the agreement, the Company paid $13,560,000 in cash, which was allocated to
management service agreements and is being amortized over 40 years.
Accounting Treatment
The terms of the Company's relationships with its affiliated physicians are
set forth in various asset and stock purchase agreements, management service
agreements, and employment and consulting agreements. Through the asset and/or
stock purchase agreement, the Company acquires the equipment, furniture,
fixtures, supplies and, in certain instances, service agreements, of a physician
practice at the fair market value of the assets. The accounts receivable are
typically purchased at the net realizable value. The purchase price of the
practice generally consists of
F-89
<PAGE>
cash, notes and/or Common Stock of the Company and the assumption of certain
debt, leases and other contracts necessary for the operation of the practice.
The management services or employment agreements delineate the responsibilities
and obligations of each party.
Net revenue from management service agreements include the revenues
generated by the physician practices. The Company is responsible and at risk for
the operating costs of the physician practices. Expenses include the
reimbursement of all medical practice operating costs and all payments to
physicians (which are reflected as cost of affiliated physician management
services) as required under the various management agreements. For providing
services under management services agreements entered into prior to April 30,
1996, physicians generally received a fixed percentage of net revenue of the
practice. "Net revenues" is defined as all revenue computed on an accrual basis
generated by or on behalf of the practice after taking into account certain
contractual adjustments or allowances. The revenue is generated from
professional medical services furnished to patients by physicians or other
clinicians under physician supervision. In several of the practices, the Company
has guaranteed that the net revenues of the practice will not decrease below the
net revenues that existed immediately prior to the agreement with the Company.
Under management services agreements entered into after April 30, 1996, the
physicians receive a portion of the operating income of the practice which
amounts vary depending on the profitability of the practice. Net revenues under
management services agreements for the six months ended July 31, 1997 and the
year ended January 31, 1997 were $75.7 million and $90.2 million, respectively.
Medical Support Services Companies Acquisitions and CSL Merger
Acquisitions
During August 1996, the Company acquired the business and certain assets of
a single site clinical research company in Sarasota, Florida for $300,000 plus
contingent consideration based on profitability measures over the next five
years. The purchase price consisted of $100,000 of cash and the issuance of two
subordinated promissory notes of $100,000 each. The contingent payments will
equal 15% of the increase in adjusted income before tax, of the acquired
business, over the prior year's amount. The contingent payments will not be less
than $221,025. The full amount of the minimum payments was accrued for at the
date of the acquisition. During October 1996, the Company acquired the business
and certain assets of a multi-site clinical research company in Pennsylvania for
$6,850,000 plus contingent consideration based on profitability measures over
the next five years. The purchase price consisted of $3,100,000 of cash and the
issuance of two subordinated promissory notes of $2,000,000 and $1,750,000,
respectively. The contingent payments will equal 15% of the excess of adjusted
income before tax over $2,000,000 per year for five years. The cost of these
acquisitions was allocated on the basis of the estimated fair value of the
assets acquired and the liabilities assumed. This allocation resulted in
goodwill of $6,966,000, noncompete agreements of $355,000 and trained workforces
of $50,000. The notes mentioned above are convertible into shares of Common
Stock.
During October 1996, the Company purchased the assets of an outpatient
ambulatory surgical center in Florida. The Company entered into a lease under
which the surgical center was leased to a partnership with an initial term of 15
years. In addition, the Company entered into a 20-year management agreement
pursuant to which the Company receives a management fee which is based upon the
performance of the surgical center. The purchase price for these assets was
$3,531,630 plus the assumption of debt of $1,223,625 which consisted of $717,557
in a mortgage payable and $506,068 in capital leases. The purchase price has
been allocated to the assets at their fair market value, including management
service agreements of $2,597,409. The resulting intangible is being amortized
over 20 years.
During April 1997, the Company acquired the business and certain assets of
a clinical research company in the Washington, D.C. area for $725,000 in the
form of a promissory note plus contingent consideration based on revenue and
profitability measures over the next five years. The contingent payments will
equal 10% of the excess gross revenue, as defined, provided the gross operating
margins of the acquired business exceed 30%. The purchase price was allocated to
goodwill. The note and contingent payments are, in certain circumstances,
convertible into shares of Common Stock.
During June 1997, the Company purchased the assets of two diagnostic
imaging centers in Dade County, Florida. The purchase price was approximately
$12,500,000 plus the assumption of debt and capital leases totaling
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$1,570,078. Of such purchase price, $500,000 was paid in cash and the remaining
$12,000,000 was paid by the issuance of 773,026 shares of Common Stock of the
Company, 562,500 of which were issued in June 1997 and 210,526 of which were
issued in September 1997. The purchase price was allocated to the assets at
their fair market value, including goodwill of $10,180,273. The resulting
intangible is being amortized over 30 years.
During June 1997, the Company acquired the remaining 20% interest in a
lithotripsy company that it purchased during 1994. The interest was acquired in
exchange for cash and 54,500 shares of Common Stock of the Company having a
total value of $2,005,000. The purchase price was allocated to goodwill and is
being amortized over 20 years.
During June 1997, the Company issued 100,002 shares of Common Stock of the
Company having a value of approximately $1,500,000 to the former shareholders of
Pinnacle Associates, Inc. ("Pinnacle"). The issuance of the shares represented
the merger consideration for Pinnacle which was purchased during 1995.
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CSL Merger
Effective October 15, 1997, a subsidiary of the Company merged with CSL in
a transaction that was accounted for as a pooling of interests. The Company
exchanged 5,204,305 shares of its common stock for all of the outstanding common
stock of CSL. The Company's historical financial statements for all periods have
been restated to include the results of CSL.
The following table reflects the combined revenues, net income, net income
per share and weighted average number of shares outstanding for the respective
periods. The Pro forma Combined column adjusts the historical net income for CSL
to reflect the results of operations as if CSL had been a C corporation rather
than an S corporation for income tax purposes. The Adjusted Pro forma Combined
column adjusts the Pro Forma Combined column by eliminating certain
noncontinuing charges incurred by CSL. Provisions for income taxes have not been
reflected for the years ended December 31, 1994 and 1995 because there is no
taxable income on a combined basis.
<TABLE>
<CAPTION>
Adjusted
Pro forma Pro forma
PhyMatrix CSL Combined Combined
------------ ------------ ------------- ------------
For the six months ended July 31, 1997
---------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $145,646,752 $13,128,176 $158,774,928 $158,774,928
Net Income $ 8,196,216 $ 377,687 $ 8,573,903 $ 9,118,103
Net Income per weighted
average share $ 0.34 $ 0.07 $ 0.29 $ 0.31
Weighted average number of
shares outstanding 23,863,289 5,289,127 29,152,416 29,152,416
For the six months ended July 31, 1996
---------------------------------------------------------
Revenue $ 77,631,077 $ 7,031,545 $ 84,662,622 $ 84,662,622
Net Income $ 5,062,509 $ 391,675 $ 5,454,184 $ 5,965,984
Net income per weighted
average share $ 0.23 $ 0.07 $ 0.20 $ 0.22
Weighted average number of
shares outstanding 21,689,631 5,086,932 26,776,563 26,776,563
For the year ended January 31, 1997
---------------------------------------------------------
Revenue $189,960,735 $18,040,124 $208,000,859 $208,000,859
Net Income $ 12,056,531 $ 1,940,074 $ 13,996,605 $ 15,154,005
Net income per weighted
average share $ 0.54 $ 0.37 $ 0.51 $ 0.55
Weighted average number of
shares outstanding 22,511,448 5,191,625 27,703,073 27,703,073
For the year ended December 31, 1995
---------------------------------------------------------
Revenue $ 70,733,282 $13,351,843 $ 84,085,125 $ 84,085,125
Net Income $(11,024,915) $ 2,931,175 $ (8,093,740) $ (5,960,740)
For the year ended December 31, 1994
---------------------------------------------------------
Revenue $ 2,446,821 $ 4,921,285 $ 7,368,106 $ 7,368,106
Net Income $ (1,296,737) $ (98,702) $ (1,395,439) $ (473,439)
</TABLE>
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The following items reflect the noncontinuing charges, referred to above,
incurred by CSL during the respective periods:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
------------------------------------------------ ---------------------------------
December 31, December 31, December 31, June 30, July 31,
1994 1995 1996 1996 1997
----------- -------------- -------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Salaries expense related to the $ - $ - $ 628,000 $ - $ -
equity interest granted to an
officer of CSL. During January
1997, the officer entered into an
employment agreement with no
provisions for sharing of profits
or proceeds.
Consulting fees based on a profit 120,000 433,000 314,000 145,000 -
sharing arrangement. The profit
sharing arrangement was
terminated during 1997.
Management fees paid to the 802,000 1,700,000 987,000 708,000 907,000
principal shareholders of CSL
----------- -------------- -------------- -------------- --------------
Total nonrecurring items 922,000 2,133,000 1,929,000 853,000 907,000
After tax impact of nonrecurring $ 922,000 $ 2,133,000 $1,157,400 $ 511,800 $ 544,200
items
</TABLE>
Prior to its merger with the Company, CSL reported on a fiscal year ending
December 31. Prior to its initial public offering during January 1996, the
Company reported on a fiscal year ending December 31. The fiscal year end of the
Company was changed to January beginning with the one month period ended January
31, 1996. The restated financial statements for the year ended January 31, 1997
are based on a combination of the Company's results for its January 31 fiscal
year and a December 31 fiscal year for CSL. CSL's historical results of
operations for the month ending January 31, 1997 are not included in the
Company's consolidated statements of operations or cash flows. An adjustment has
been made to stockholder's equity as of February 1, 1997 to adjust for the
effect of excluding CSL's results of operations for the month ending January 31,
1997.
As a result of using the pooling of interests method of accounting,
estimated transaction expenses of $10,150,000 will be recorded as a one-time
charge to the Company's statement of operations during the quarter ended October
31, 1997, which is the period in which the transaction closed. A summary of
these estimated expenses is as shown below:
CSL PhyMatrix Total
---------- --------- ----------
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
---------- -------- -----------
(1) Represents buyout of consulting contract.
Management Services Organizations and Contract Management Acquisitions
During December 1995, the Company obtained a 43.75% interest in Physicians
Choice Management, LLC, an MSO that provides management services to an IPA
composed of over 375 physicians based in Connecticut. The
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Company acquired this interest in exchange for a payment of $1.5 million to the
MSOs shareholders ($1.0 million paid during 1995 and $.5 million paid during the
second quarter of 1996) and a capital contribution of $2.0 million to the MSO
($1.5 million paid during 1995 and $.5 million paid during the second quarter of
1996). In addition, upon the closing of the Company's initial public offering in
January 1996, the Company granted options to purchase 300,000 shares of Common
Stock to certain MSO employees in conjunction with their employment agreements.
These options vest over a two-year period with the exercise price equaling the
fair market value of the Company's stock on the date such shares become
exercisable. During September 1996, the Company acquired the remaining 56.25%
ownership interest in the MSO. The Company acquired the remaining interests in
exchange for a payment of $1,000,000 in cash plus 363,442 shares of Common Stock
of the Company. The Company also committed to loan the MSO's selling
shareholders $2,800,000 to pay the tax liability related to the sale. As of
January 31, 1997 $2,253,000 of the loan amount committed had been advanced to
the selling shareholders by the Company. The total purchase price for the 100%
interest was approximately $12,148,822 and has been allocated to these assets at
their fair market value including goodwill of $12,099,111. The resulting
intangible is being amortized over 40 years.
During April 1996, the Company purchased a 50% interest in Central Georgia
Medical Management, LLC, an MSO that provides management services to an IPA
composed of 45 physicians based in Georgia. The Company acquired this interest
in exchange for a payment of $550,000 to existing shareholders and a capital
contribution of $700,000 to the MSO. The Company's balance sheet as of January
31, 1997 includes the 50% interest not owned by the Company as minority
interest. The owners of the other 50% interest in the MSO have a put option to
the Company to purchase their interests. This put option vests over a four year
period. The price to the Company to purchase these interests equals 40% of the
MSO's net operating income as of the most recent fiscal year multiplied by the
price earnings ratio of the Company. The minimum price earnings ratio used in
such calculation will be 4 and the maximum 10.
During September 1996, the Company purchased an 80% interest in New Jersey
Medical Management, LLC, an MSO that provides management services to an IPA with
more than 450 physicians in New Jersey. The Company acquired this interest in
exchange for a payment of $350,000 to existing shareholders. The Company's
balance sheet at January 31, 1997 includes the 20% interest not owned by the
Company as minority interest.
During September 1996, the Company purchased the stock of Physicians
Consultant and Management Corporation ("PCMC"), a company based in Florida that
provides the managed health care industry with assistance in provider relations,
utilization review and quality assurance. The base purchase price for the stock
was $2,000,000 with $1,000,000 paid on the closing date and $1,000,000 paid
during February 1997. There is also a contingent payment up to a maximum of
$10,000,000 based on PCMC's earnings before taxes during the next five years
which will be paid in cash and/or Common Stock of the Company. The purchase
price has been allocated to the assets at their fair market value including
goodwill of approximately $3,078,568. The resulting intangible is being
amortized over 30 years.
During November 1996, the Company established New York Network Management,
L.L.C. ("Network"), which is 51% owned by the Company, to purchase the assets
and stock of various entities which comprise Brooklyn Medical Systems ("BMS").
BMS arranges for the delivery of health care services to members through
affiliations with more than 600 physicians in the New York City area. The base
purchase price for Network was $1,200,000 and an additional payment not
exceeding $1,000,000 may be required to be made during the next three years if
certain pretax earnings thresholds are achieved. The Company has committed to
fund approximately $2,400,000 to Network during the next three years. Such
advances can be in the form of a demand loan or for additional ownership
interests if the other owners do not elect to contribute their pro-rata share of
any additional capital contribution ($100,000 of additional capital contribution
for an additional 1% interest) in Network. During the first three years the
Company has the option to purchase up to an additional 29% ownership interest.
During years four and five the owners of 29% of Network have the right to
require the Company to purchase their interests at the option price.
During April 1997, the Company acquired a pulmonary physician network
company for a base purchase price of $2,966,058. Of such purchase price,
$673,211 was paid in cash and 180,717 shares of Common Stock of the Company were
issued during May 1997 having a value of $2,292,847. There is also a contingent
payment up to a maximum of $2,000,000 based on the acquired entities' earnings
before taxes during the next three years which will
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be paid in cash and/or Common Stock of the Company. The purchase price was
allocated to management service agreements and is being amortized over 30 years.
Year Ended December 31, 1995 Acquisitions
Physician Practice Acquisitions
During the year ended December 31, 1995, the Company purchased the assets
of several physician practices and in conjunction with those purchases entered
into employment agreements with 14 physicians in Florida. The total purchase
price for these assets was $4,158,875. The purchase price was allocated to these
assets at their fair market value, including goodwill of $3,093,946. The
resulting goodwill is being amortized over 20 years.
During the year ended December 31, 1995, the Company purchased the assets
of and entered into management service agreements with Oncology-Hematology
Associates, P.A. and Oncology-Hematology Infusion Therapy, Inc.; Georgia Cancer
Specialists, Inc.; Osler Medical, Inc.; Oncology Radiation Associates, P.A.;
West Shore Urology; Whittle, Varnell and Bedoya, P.A.; Oncology Care Associates;
Venkat Mani; and Symington, consisting of an aggregate of 79 physicians
including 45 oncologists. The total purchase price for these assets was
$23,425,190 in cash. In connection with these acquisitions, the Company also
entered into a 15-year capital lease with a total obligation of $1,569,171 and
assumed debt of $6,893,609. The purchase price for the practices' assets was
allocated to assets at their fair market value, including management service
agreements of $18,814,763. The resulting intangible is being amortized over the
life of the management agreements which range from ten to 20 years.
Medical Support Services Companies Acquisitions
During March 1995, the Company acquired by merger all of the outstanding
shares of stock of Oncology Therapies, Inc. (formerly known as Radiation Care,
Inc. and referred to herein as "OTI") for $2.625 per share. OTI owns and
operates outpatient radiation therapy centers utilized in the treatment of
cancer and diagnostic imaging centers. The total purchase price for the stock
was approximately $41,470,207 (not including transaction costs and 26,800 shares
initially subject to appraisal rights). During April 1995, the Company purchased
from Aegis Health Systems, Inc. for $7,163,126 all of the assets used in its
lithotripsy services business. During November 1995 the Company acquired by
merger Pinnacle Associates, Inc. ("Pinnacle"), an Atlanta, Georgia infusion
therapy services company. The merger consideration in connection with the
Pinnacle merger was paid in June 1997. The purchase price for these acquisitions
was allocated to assets at their fair market value including goodwill of
$19,235,818. The resulting intangibles are being amortized over 20 to 40 years.
Medical Facility Development Acquisitions
On May 31, 1995, Abraham D. Gosman, Chairman of the Board and Chief
Executive Officer of the Company ("Mr. Gosman") purchased a 50% ownership
interest in DASCO Development Corporation and DASCO Development West, Inc.
(collectively, "DASCO"), a medical facility development services company
providing such services to related and unrelated third parties in connection
with the development of medical malls, health parks, and medical office
buildings. The purchase price consisted of $5.2 million in cash and $4.6 million
in notes, which were guaranteed by Mr. Gosman. Upon the closing of the Company's
initial public offering, Mr. Gosman, Donald A. Sands and Bruce A. Rendina, the
Company's principal promoters, and certain management and founder stockholders
exchanged their ownership interests in DASCO for shares of Common Stock equal to
a total of $55 million or 3,666,667 shares. The Company believes that its
medical facility development services and project finance strategy are a
significant component of the Company's overall business strategy. The historical
book value of Messrs. Sands' and Rendina's interest in DASCO is $22,735. The
initial 50% purchase price was allocated to assets at their fair market value,
primarily goodwill of $9.8 million with the exchange recorded at historical
value. At December 31, 1995, the acquisition of the 50% interest in DASCO was
being accounted for using the equity method.
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<PAGE>
Year Ended December 31, 1994 Acquisitions
Medical Support Services Companies Acquisitions
During September 1994, an 80% owned subsidiary of the Company purchased
substantially all of the assets of Uromed Technologies, Inc. ("Uromed"), a
provider of lithotripsy services in Florida, for a purchase price of $3,141,535
plus the assumption of capital lease obligations of $1,097,614. The Company
acquired the outstanding 20% interest in the subsidiary during June 1997. During
November 1994, the Company purchased 80% of the stock of Nutrichem, Inc.
("Nutrichem"), an infusion therapy company doing business in Maryland, Virginia,
and the District of Columbia, for $3,528,704 in cash and a contingent note in
the amount of $6,666,667, subject to adjustments. A charge of $1,271,000 related
to this contingent note was recorded during the year ended December 31, 1995.
The remaining $5,395,667 was allocated to goodwill at December 31, 1995 and is
being amortized. Subsequent to its initial public offering, the Company acquired
the outstanding 20% interest in Nutrichem in exchange for 266,666 shares of
Common Stock resulting in additional purchase price of $4,000,000. During
November 1994, the Company acquired all of the assets and assumed certain
liabilities of First Choice Health Care Services of Ft. Lauderdale, Inc., First
Choice Health Care Services, Inc. and First Choice Home Care Services of Boca
Raton, Inc., home health care companies doing business in Florida, for a total
purchase price of $2,910,546 in cash plus the assumption of $225,000 in debt.
The purchase price for these acquisitions was allocated to assets at their fair
market value, including goodwill of $14,818,145. The resulting intangibles are
being amortized over 20 to 40 years.
During December 1994, the Company purchased a 36.8% partnership interest in
Mobile Lithotripter of Indiana Partners, a provider of lithotripsy services in
Indiana, from Mobile Lithotripter of Indiana, Limited, for $2,663,000 in cash.
This investment is being accounted for by the equity method.
Results of Operations
Six Months Ended July 31, 1997 Compared to Six Months Ended July 31, 1996
The following discussion reviews the results of operations for the six
months ended July 31, 1997 (the "1997 Period") compared to the six months ended
July 31, 1996 (the "1996 Period").
Revenues
The Company derives revenues from health care services and medical facility
development services. Within the health care segment, the Company distinguishes
between revenues from cancer services, noncancer physician services and other
medical support services. Cancer services include physician practice management
services to oncology practices and certain medical support services, including
radiation therapy, diagnostic imaging and infusion therapy. Noncancer physician
services include physician practice management services to all practices managed
by the Company other than oncology practices and administrative services to
health plans which include reviewing, processing, and paying claims and
subcontracting with specialty care physicians to provide covered services. Other
medical support services include home health care services, lithotripsy, various
health care management services, diagnostic imaging, ambulatory surgery, and
clinical research studies.
Net revenues were $158.8 million for the 1997 Period. Of this amount, $52.2
million or 32.9% of such revenues was attributable to cancer services; $67.9
million or 42.8% was related to noncancer physician services; $28.2 million or
17.7% of such revenues was attributable to other medical support services; and
$10.5 million or 6.6% related to medical facility development.
Net revenues were $84.7 million for the 1996 Period. Such revenues
consisted of $44.3 million or 52.3% related to cancer services; $15.9 million or
18.8% related to noncancer physician services; $17.1 million or 20.2% related to
other medical support services; and $7.4 million or 8.7% related to medical
facility development.
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<PAGE>
Expenses
The Company's cost of affiliated physician management services was $33.5
million or 44.3% of net revenue from management services agreements during the
1997 Period. The cost of affiliated physician management services was $17.4
million or 47.7% of net revenue from management services agreements during the
1996 Period. Net revenue for the physician practices managed by the Company was
$75.7 million during the 1997 Period and $36.5 million during the 1996 Period.
The cost of affiliated physician management services as a percentage of net
revenue from management services varies based upon the type of physician
practices.
The Company's salaries, wages, and benefits increased by $12.4 million from
$26.7 million or 31.5% of net revenues during the 1996 Period to $39.1 million
or 24.6% of net revenues during the 1997 Period. The decrease as a percentage of
net revenues is primarily attributable to (i) the fact that since the Company's
commencement of operations during 1994, it has been able to spread its salaries,
wages, and benefits over a rapidly expanding revenue base and (ii) salaries,
wages, and benefits varies depending on whether the physician practice is owned
or managed.
The Company's supplies expense increased by $8.2 million from $11.7 million
or 13.8% of net revenues during the 1996 Period to $19.9 million or 12.5% of net
revenues during the 1997 Period. The increase in supplies expense is primarily a
result of the acquisition of additional physician practices. Supplies expense as
a percentage of net revenues varies depending upon the type of physician
practices.
The Company's depreciation and amortization expense increased by $1.6
million from $3.3 million or 3.9% of net revenues during the 1996 Period to $4.9
million or 3.1% of net revenues during the 1997 Period. The increase is
primarily a result of the acquisitions completed after the 1996 Period and the
allocation of the purchase price as required by purchase accounting. During the
1997 Period, the Company sold the assets of an entity that it acquired in March
1995 and subsequently closed. The sale of the assets resulted in a gain of $0.7
million. In addition, the Company recorded nonrecurring charges of $0.4 million
during the 1997 Period. These nonrecurring items have been included in other
expenses on the statement of operations.
The Company's rent expense increased by $3.4 million from $3.8 million or
4.5% of net revenues during the 1996 Period to $7.2 million or 4.5% of net
revenues during the 1997 Period. Rent expense as a percentage of net revenue
varies depending upon the size of each of the affiliated practice's offices, the
number of satellite offices and the current market rental rate for medical
office space in a particular geographic market.
The Company's income tax expense increased by $1.5 million from $3.0
million or 34.7% of pre-tax income during the 1996 Period to $4.5 million or
34.0% of pre-tax income during the 1997 Period. The Company follows the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting For Income Taxes."
Prior to the CSL merger, CSL was treated as a S corporation under the
Internal Revenue Code (the "Code") and its stockholders recognized its income
for income tax purposes. Accordingly, the Company's statements of operations do
not include provisions for income taxes for income related to CSL. Prior to the
CSL merger, dividends were paid primarily to reimburse stockholders for income
tax liabilities incurred by them.
The pro forma net income and net income per share information in the
consolidated statement of operations reflect the effect on historical results as
if CSL had been a C corporation rather than an S corporation and had paid income
taxes.
Medical Facility Development
The Company provides medical facility development services to related and
unrelated third parties in connection with the establishment of health parks,
medical malls and medical office buildings. The Company believes that the
development of such facilities, in certain markets, will aid in the integration
of its affiliated physicians and medical support services and will provide
future opportunities to affiliate with physicians and acquire future physician
practices or support services. Further, the Company believes that the
development of health parks, medical malls and
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medical office buildings in certain markets will aid in the integration of its
affiliated physicians and medical support services.
The Company derives its medical facility development service revenues from
the provision of a variety of services. In rendering such services, the Company
generates income without bearing the costs of construction, expending
significant capital or incurring substantial indebtedness. Net revenues from
medical facility development are recognized at the time services are performed.
In some cases fees are earned upon the achievement of certain milestones in the
development process, including the receipt of a building permit and a
certificate of occupancy of the building. Unearned revenue relates to all fees
received in advance of services being completed on development projects.
The Company typically receives the following compensation for its services:
development fees (including management of land acquisition, subdivision, zoning,
surveying, site planning, permitting and building design), general contracting
management fees, leasing and marketing fees, project cost savings income (based
on the difference between total budgeted project costs and actual costs) and
consulting fees.
The amount of development fees and leasing and marketing fees are stated in
the development and marketing agreements. Those agreements also provide the
basis for payment of the fees. The financing fees and consulting fees are
generally not included in specific agreements but are negotiated and disclosed
in project pro formas provided to the owners of the buildings and hospital
clients. Specific agreements usually incorporate those pro formas and provide
that the projects will be developed in conformity therewith. General contracting
management fees and project cost savings income are included in guaranteed
maximum cost contracts entered into with the general contractor. These contracts
are usually approved by the owners which in many cases include hospital clients
and prospective tenants. During the 1997 Period, the Company's medical facility
development generated revenues of $10.4 million and pretax income of $6.5
million.
Results of Operations
Year Ended January 31, 1997 Compared to the Year Ended December 31, 1995
The following discussion reviews the results of operations for the year ended
January 31, 1997 ("1997"), compared to the year ended December 31, 1995
("1995"), respectively.
Revenues
Net revenues were $208.0 million during 1997. Of this amount, $95.0 million
or 45.7% of such revenues was attributable to cancer services; $55.4 million or
26.6% was related to noncancer physician services; $38.6 million or 18.6% of
such revenues was attributable to other medical support services; and $19.0
million or 9.1% related to medical facility development. At January 31, 1997,
the Company had affiliations with 226 physicians.
Net revenues were $84.1 million during 1995. Of this amount, $44.9 million
or 53.4% of such revenues was attributable to cancer services; $7.7 million or
9.2% related to noncancer physician services; and $31.5 million or 37.4% related
to other medical support services. At December 31, 1995, the Company had
affiliations with 103 physicians.
Expenses
The Company's cost of affiliated physician management services was $42.2
million or 46.8% of net revenue from management service agreements during 1997.
The cost of affiliated physician management services was $9.7 million or 43.3%
of net revenue from management service agreements during 1995. Net revenue for
these managed physician practices was $90.2 million during 1997 and $22.4
million during 1995, respectively. The cost of affiliated physician management
services as a percentage of net revenue from management services will vary based
upon the type of physician practices.
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<PAGE>
The Company's salaries, wages, and benefits increased by $22.5 million from
$35.8 million or 42.5% of net revenues during 1995 to $58.4 million or 28.1% of
net revenues during 1997. The decrease as a percentage of net revenues is
primarily attributable to (i) the fact that since the Company's commencement of
the Company's non-clinical research study operations during 1994, it has been
able to spread its salaries, wages, and benefits over a rapidly expanding
revenue base and (ii) salaries, wages and benefits varies depending upon whether
the physician practice is owned or managed.
The Company's supplies expense increased by $15.1 million from $12.1
million or 14.4% during 1995 to $27.2 million or 13.1% during 1997. The increase
in supplies expense is primarily a result of the acquisition of additional
physician practices. The supplies expense as a percentage of net revenues will
vary based upon the type of physician practices.
The Company's depreciation and amortization expense increased by $3.4
million from $4.0 million or 4.7% of net revenues during 1995 to $7.4 million or
3.5% of net revenues during 1997. The increase primarily is a result of the
acquisitions completed during 1997 and the allocation of the purchase prices as
required per purchase accounting. One of the reasons for the decrease as a
percentage of net revenues is a result of the increased revenues during 1997
from the entities previously acquired.
The Company's rent expense increased by $3.4 million from $5.1 million or
6.1% of net revenues during 1995 to $8.5 million or 4.1% of net revenues during
1997. Rent and lease expenses as a percentage of net revenue will vary based on
the size of each of the affiliated practice offices, the number of satellite
offices, and the current market rental rate for medical office space in the
particular geographic markets.
The Company's provision for closure loss of $2.5 million during 1995
represents a charge for the writedown of assets to their estimated fair market
value and a reserve for the remaining lease obligation at two radiation therapy
centers that were acquired by the Company in March 1995 and subsequently closed.
The Company's earn-out payment during 1995 of $1.3 million represents a
payment to Nutrichem on the contingent note entered into in conjunction with the
acquisition of Nutrichem. During 1997 the Company sold its Nashville radiation
therapy center to a third party for $1.5 million which resulted in a gain on
sale of approximately $260,000. In addition, during 1997 the Company recorded a
charge of $250,000 related to the termination of an employment agreement with a
physician. These two nonrecurring items have been included in other expenses on
the statement of operations for 1997.
The Company's net interest expense decreased by $3.1 million from 1995 to
1997. Interest income of $4.1 million was earned during 1997, primarily on the
remaining proceeds from the Company's initial public offering and Convertible
Subordinated Debenture offering.
No income tax provision was required during 1995 due to the Company's tax
loss and the inability of the Company to use the benefits which prior to the
completion of the initial public offering primarily accrued to Mr.
Gosman.
F-99
<PAGE>
Medical Facility Development
The Company provides medical facility development services to related and
unrelated third parties in connection with the establishment of health parks,
medical malls, and medical office buildings. The amount of development fees and
leasing and marketing fees are stated in the development and marketing
agreements. Those agreements also provide the basis for payment of the fees. The
financing fees and consulting fees are generally not included in specific
agreements but are negotiated and disclosed in project pro formas provided to
the owners of the buildings and hospital clients. Specific agreements usually
incorporate those pro formas and provide that the projects will be developed in
conformity therewith. General contracting management fees and project cost
savings income are included in guaranteed maximum cost contracts entered into
with the general contractor. These contracts are usually approved by the owners
which in many cases include hospital clients and prospective tenants. During
1997, the Company's medical facility development business generated revenues of
$19.0 million and operating income of $11.1 million.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
The following discussion reviews the historical results of operations for
the year ended December 31, 1995 ("1995") compared to the year ended December
31, 1994 ("1994").
All of the entities acquired by the Company (except the acquisition of CSL
which has been shown as being acquired as of January 1, 1994) were acquired
subsequent to June 23, 1994. As a result of such acquisitions, the Company
believes that any period to period comparisons and percentage relationships
within periods are not meaningful.
Revenues
The Company had revenues of $7.4 million for 1994. Of this amount, $.7
million or 9.5% of such revenues was attributable to cancer services; and $6.7
million or 90.5% of such revenues was attributable to other medical support
services. The Company had no physician related revenues during this period.
Net revenues of $84.1 million for 1995 include revenues from the
acquisitions completed during the period June 24, 1994 to December 31, 1995.
Such revenues during 1995 consisted of $44.9 million or 53.3% related to cancer
services; $7.7 million or 9.2% related to noncancer physician services; and
$31.5 million or 37.5% related to other medical support services. As of December
31, 1995, the Company had affiliations with 55 physicians providing cancer
related services, 14 employed primary care physicians, and 34 other multigroup
of specialty physicians.
Expenses
For 1994 and for 1995, total operating and administrative expenses were
$8.7 million and $87.9 million, respectively. In 1994 and 1995, operating and
administrative expenses exceeded revenues due to the commencement of the
Company's non-clinical research study operations. No income tax provision was
required due to the Company's tax loss and the inability of the Company to use
the benefits which prior to the completion of the initial public offering
primarily accrued to Mr. Gosman.
Liquidity and Capital Resources
Cash used by operating activities was $2.1 million for the 1997 Period.
Cash used by operating activities was $2.5 million for the 1996 Period. At July
31, 1997, the Company's principal sources of liquidity consisted of working
capital of $100.2 million which included $59.4 million in cash. The Company also
had $27.1 million of current liabilities, including approximately $3.6 million
of indebtedness maturing before July 31, 1998.
Cash used by investing activities was $19.5 million and $9.1 million for
the 1997 Period and 1996 Period, respectively. This primarily represents the
funds required by the Company for the acquisition of physician practices,
medical support services companies, or other medical networks or organizations,
and the advances under notes
F-100
<PAGE>
receivable of $5.3 million, partially offset by the repayments of notes
receivable of $10.0 million during the 1997 Period. In addition, during the 1997
Period, the Company sold one of its radiation therapy centers that had been
previously closed for $1.5 million.
Cash used by financing activities was $0.7 million for the 1997 Period and
primarily represented the borrowings under the revolving line of credit of $1.0
million, repayment of debt of $1.7 million and the release of restricted cash
collateralizing debt of $0.5 million. Cash provided by financing activities was
$74.3 million for the 1996 Period, which was primarily comprised of the proceeds
(net of offering costs) from the issuance of the Convertible Subordinated
Debentures of $94.8 million and the release of cash collateral of $1.5 million
offset by the repayment of advances from shareholder and other debt of $15.4
million and $5.5 million, respectively.
During 1996, the Company purchased the stock of a company based in Florida
that provides the managed health care industry with assistance in provider
relations, utilization review and quality assurance. In conjunction with this
acquisition, the Company may be required to make a contingent payment up to a
maximum of $10 million based on the acquired company's earnings before taxes
during the next five years. The payment, if required, shall be paid in cash
and/or Common Stock of the Company.
During July 1997, the Company entered into a management services agreement
to manage a network of over 100 physicians in New York. In connection with this
transaction, the Company has committed to expend up to $40 million to be
utilized for the expansion of the network.
During August 1997, the Company purchased certain assets of, and entered
into a 20-year administrative services agreement with BAB Nuclear Radiology,
P.C., to operate five diagnostic imaging centers on Long Island, New York. The
purchase price was approximately $10,000,000 in cash, plus $15,000,000 in
convertible notes.
During October 1997, a subsidiary of the Company merged with CSL in a
transaction that was accounted for as a pooling of interests. Pursuant to such
merger, the Company will record a one-time charge during the third quarter ended
October 31, 1997 of $10.1 million. This one-time charge represents estimated
transaction expenses and the one-time cost to buy out a consulting contract. In
addition, upon the closing of the merger during October 1997, the Company used
cash of approximately $5.0 million to repay CSL's revolving line of credit.
In conjunction with certain of its acquisitions, the Company has agreed to
make payments in shares of Common Stock of the Company which are generally
issued one year from the closing date of such acquisitions. The number of shares
to be issued are generally determined based upon the average price of the
Company's Common Stock during the five business days prior to the date of
issuance. As of July 31, 1997, the Company had committed to issue $10.9 million
of Common Stock of the Company using the methodology discussed above.
The Company's acquisition and expansion programs will require substantial
capital resources. In addition, the operation of physician groups, integrated
networks and related medical support services companies, and the development and
implementation of the Company's management information systems, will require
ongoing capital expenditures. The Company expects that its capital needs over
the next several years will substantially exceed capital generated from
operations. To finance its capital needs, the Company plans both to incur
indebtedness and to issue, from time to time, additional debt or equity
securities, including Common Stock or convertible notes, in connection with its
acquisitions and affiliations.
In September 1997, the Company entered into a secured credit agreement with
a bank providing for a $100 million revolving line of credit for working capital
and acquisition purposes. The credit agreement (i) prohibits the payment of
dividends by the Company, (ii) limits the Company's ability to incur
indebtedness and make acquisitions except as permitted under the credit
agreement and (iii) requires the Company to comply with certain financial
covenants.
The Company expects that the working capital as of July 31, 1997 of $100.2
million, which includes cash of $59.4 million, and amounts available under an
acquisition/working capital line of credit for $100 million will be adequate to
satisfy the Company's cash requirements for the next 12 months. However, there
can be no assurance that
F-101
<PAGE>
the Company will not be required to seek additional financing during this
period. The failure to raise the funds necessary to finance its future cash
requirements would adversely affect the Company's ability to pursue its strategy
and could adversely affect its results of operations for future periods.
Factors to be Considered
The part of this Form 8-K captioned "Management's Discussion and Analysis
of Financial Condition and Results of Operations" contains certain
forward-looking statements which involve risks and uncertainties. Readers should
refer to the factors set forth below and the factors discussed under "Factors to
be Considered" contained in Part I, Item 1 of the Company's Annual Report on
Form 10-K for the year ended January 31, 1997, which factors could cause the
Company's actual results to differ materially from the results anticipated in
such forward-looking statements. The factors discussed in said Form 10-K are
hereby incorporated by reference into this Form 8-K.
POTENTIAL LOSS OF CONTRACTS. Although the Company's clinical research
study contracts with sponsors provide that it is entitled to receive fees earned
through the date of termination, as well as all non-cancellable costs, sponsors
generally are free to terminate a clinical trial or the Company's contract
related thereto at any time. The length of a typical clinical trial contract
varies from several weeks to several years. Sponsors may terminate clinical
trials for several reasons, including unexpected results or adverse patient
reactions to a potential product, inadequate patient enrollment or investigator
recruitment, manufacturing problems resulting in shortages of a potential
product or decisions by the sponsor to de-emphasize or terminate a particular
trial or development efforts with respect to a particular potential product. A
sponsor's decision to terminate a trial in which the Company participates could
have a material adverse effect on the Company's business, results of operations
and financial condition.
GOVERNMENT REGULATION; POTENTIAL IMPACT OF HEALTH CARE REFORM. Demand
for the Company's services is largely a function of the regulatory requirements
associated with the approval of a new drug application imposed by the United
States Food and Drug Administration ("FDA"). These requirements are more
stringent and thus more burdensome than those imposed by many other developed
countries. In recent years, efforts have been made to streamline the drug
approval process and coordinate United States standards with those of other
developed countries. Changes in the level of regulation, including a relaxation
in regulatory requirements or the introduction of simplified drug approval
procedures could have a material adverse effect on the demand for the Company's
clinical trial services. Several competing proposals to reform the system of
health care delivery in the United States have been considered by Congress from
time to time. None of the proposals have been adopted. The process by which the
government will pursue additional or modified proposals for national health care
reform and the precise nature of any such proposals is unclear at this time.
Some of the proposals put forth to date incorporate price controls on drugs and
limits on overall medical spending which may adversely affect expenditures by
the pharmaceutical and biotechnology industries for research and development,
which could have a material adverse effect on the Company's business, results of
operations and financial condition. At present, it is impossible to predict the
effect of any new legislation or changes in regulatory environment on the
Company. The failure of the Company to comply with applicable regulations could
result in the termination of on-going research or the disqualification of data
for submission to regulatory authorities. Further, the issuance of a notice or
finding by the FDA to either the Company or its clients based upon a material
violation by the Company of either Good Clinical Practices or Good Laboratory
Practices could have a material adverse effect on the Company's business,
results of operations and financial condition.
POTENTIAL LIABILITY FROM OPERATIONS. Clinical trials involve the testing of
approved and experimental drugs on human beings. This testing carries with it a
significant risk of liability for personal injury or death to participants
resulting from an adverse reaction to, or improper administration of, the
potential product. The Company participates with sponsors in the selection
process. The Company also contracts on behalf of its customers with physicians
who render, and itself renders, professional services including administering
the drugs being tested to participants in these trials. Consequently, the
Company may be subject to claims in the event of personal injury or death of
persons participating in clinical trials and arising from professional
malpractice of physicians with whom it has contracted and its own employees.
Although the Company is generally indemnified by its clients for such liability,
in order for such indemnification to be valid, the Company and its employees and
agents must act within the bounds of specific procedural requirements governing
the conduct of the clinical trial. Since the value of the Company's
indemnification depends on the financial viability of the indemnifying party,
there can be no assurance that the Company will be able to rely on such
indemnification in each instance of potential liability. If the Company was
forced to undertake the defense of, or found financially responsible for, claims
based upon the foregoing or related risks, there could be a material adverse
effect on the Company's business, results of operations and financial condition.
F-102
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
The Company is a Delaware corporation. Reference is made to Section 145 of
the Delaware General Corporation Law, as amended, which provides that a
corporation may indemnify any person who was or is a party to or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation) by reason of the fact that he
is or was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceedings, had no reasonable cause to believe his conduct was unlawful.
Section 145 further provides that a corporation similarly may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation and except
that no indemnification shall be made in respect of any claim, issue or matter
as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware Court of Chancery
or the court in which such action or suit was brought shall determine upon
application that, despite an adjudication of liability, but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper. The Company's Certificate of Incorporation further provides
that the Company shall indemnify its directors and officers to the full extent
permitted by the law of the State of Delaware.
The Company's Certificate of Incorporation provides that the Company's
directors shall not be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except to the extent that
exculpation from liability is not permitted under the Delaware General
Corporation Law as in effect at the time such liability is determined.
The Company maintains an indemnification insurance policy covering all
directors and officers of the Company and its subsidiaries.
Item 21. Exhibits and Financial Statements
(a) Exhibits. The following is a list of exhibits which are incorporated
as part of the Registration Statement by reference.
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ----------- -------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company.
3.2 By-laws of the Company.
+4 Indenture with respect to the Company's 6-3/4% Convertible Subordinated Debentures.
10.1 Stock Purchase Agreement dated May 31, 1995 by and among Dasco Development
Corporation, Dasco Development West, Inc., Donald A. Sands, Bruce A. Rendina and
Abraham D. Gosman.
10.2 Shareholders' Agreement dated as of May 31, 1995 by and among Donald A. Sands, Bruce A.
Rendina, Abraham D. Gosman, DASCO Development Corporation and DASCO
Development West, Inc.
++10.3 Asset Purchase Agreement dated August 21, 1996 between Eric Moskow, Richard Lipton,
Wayne Lipton, Physician's Choice, LLC and Physician's Choice, Inc.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ----------- -------
<S> <C>
10.4 Registration Agreement dated January 29, 1996 between PhyMatrix Corp. and various
stockholders of PhyMatrix Corp.
+10.5 Registration Agreement dated June 21, 1996 between PhyMatrix Corp. and the Initial
Purchasers.
10.6(M) Employment Agreement dated as of January 1, 1995 between DASCO and Bruce A. Rendina.
10.7(M) Employment Agreement dated September 22, 1994 between Continuum Care of Massachusetts,
Inc. and Edward E. Goldman, M.D.
10.8(M) 1995 Equity Incentive Plan.
21 Subsidiaries of the Registrant.
*23.1 Consent of Coopers & Lybrand L.L.P.
*23.2 Consent of Coopers & Lybrand L.L.P.
*23.3 Consent of Deloitte & Touche LLP
**24.1 Power of Attorney (Contained on Page II-5)
</TABLE>
- ------------
* Filed herewith.
** Previously filed.
+ Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-08269).
++ Incorporated by reference to the Company's Current Report on Form 8-K dated
September 30, 1996.
(M) Management contract or compensatory plan.
All other exhibits are hereby incorporated by reference to the Company's
Registration Statement on Form S-1 (Registration No. 33-97854).
Item 22. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted against such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-2
<PAGE>
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
Provided, however, that paragraphs (1)(i) and (1)(ii) of this section do
not apply if the registration statement is on Form S-3, Form S-8 or Form F-3,
and the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or furnished to
the Commission by the registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(4) The undersigned registrant hereby undertakes that, for the purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(5) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other Items of the applicable
form.
(6) That every prospectus (i) that is filed pursuant to paragraph (4)
immediately preceeding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a apart of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(7) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt
of such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(8) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this Amendment to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, on the 3rd
day of November 1997.
PHYMATRIX CORP.
By: /s/ Frederick R. Leathers
-------------------------------------
Frederick R. Leathers
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
/s/ * November 3, 1997
- -------------------------
Abraham D. Gosman
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
/s/ Frederick R. Leathers November 3, 1997
- -------------------------
Frederick R. Leathers
Chief Financial Officer
(Principal Financial and
Accounting Officer)
- -------------------------
Robert A. Miller
Director and President
/s/ * November 3, 1997
- -------------------------
Bruce Rendina
Vice Chairman of the
Board of Directors
/s/ * November 3, 1997
- -------------------------
Joseph N. Cassese
Director
/s/ * November 3, 1997
- -------------------------
David Livingston, M.D.
Director
- -------------------------
Stephen E. Ronai, Esq.
Director
II-4
<PAGE>
/s/ * November 3, 1997
- -------------------------
Governor Hugh L. Carey
Director
/s/ * November 3, 1997
- -------------------------
John Chay
Director
- -------------------------
Eric Moskow
Director and Executive Vice
President Strategic Planning
* By: /s/ Frederick R. Leathers November 3, 1997
- -------------------------
Frederick R. Leathers
Attorney-in-fact
A power of attorney has been previously filed.
II-5
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-4 (File
No. 333-09187) of our report dated March 13, 1997, except as to information
presented in Note 20, for which the date is April 24, 1997, on our audits of
the consolidated financial statements and financial statement schedule of
PhyMatrix Corp. as of January 31, 1997 and January 31, 1996, and for the year
ended January 31, 1997, and for the one month period ended January 31, 1996 and
the combined financial statements of PhyMatrix Corp. as of December 31, 1995
and for the year ended December 31, 1995 and for the period ended June 24, 1994
(inception) to December 31, 1994. We also consent to the reference to our firm
under the caption "Experts."
Coopers & Lybrand L.L.P.
Boston, Massachusetts
November 3, 1997
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-4 (File No.
333-09187) of our report dated October 20, 1997 on our audits of the
supplemental consolidated financial statements of PhyMatrix Corp. as of January
31, 1997 and for the year then ended and the supplemental combined financial
statements of Phymatrix Corp. as of December 31, 1995 and for the years ended
December 31, 1995 and December 31, 1994. We also consent to the reference to our
firm under the caption "Experts."
Coopers & Lybrand L.L.P.
Boston, Massachusetts
November 3, 1997
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post Effective Amendment No. 5 to Registration
Statement No. 333-09187 of PhyMatrix Corp. of our report dated May 28, 1997
(relating to the combined financial statements of Clinical Studies Ltd. and
Clinical Marketing Ltd. for fiscal years ending December 31, 1996 and 1995)
appearing in the Prospectus which is part of such Registration Statement and to
the reference to us under the heading "Experts" in such Prospectus.
Deloitte & Touche LLP
Boston, Massachusetts
November 3, 1997
