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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
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(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended October 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period from _____ to
Commission file number 0-27568
PhyMatrix Corp.
(Exact name of registrant as specified in its charter)
Delaware 65-0617076
(State of incorporation) (I.R.S. Employer Identification No.)
Phillips Point, Suite 1000E
777 S. Flagler Drive, West Palm Beach, Florida 33401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 655-3500
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such Reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
On December 11, 1998, the number of outstanding shares of the
registrant's Common Stock, par value $0.01 per share, was 33,010,606.
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<PAGE>
PHYMATRIX CORP.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets -- October 31, 1998 (unaudited) and January 31, 3
1998
Consolidated Statements of Operations (unaudited) - Three and Nine Months 4
Ended October 31, 1998 and 1997
Consolidated Statements of Cash Flows (unaudited) - Nine Months Ended 5
October 31, 1998 and 1997
Notes to Consolidated Financial Statements (unaudited) - 6-14
Three and Nine Months Ended October 31, 1998 and 1997
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 15-27
Operations
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 28
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
- ---------------------------------------------------------
Item 1. Financial Statements
PHYMATRIX CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 24,237 $ 49,536
Receivables:
Accounts receivable, net 18,999 57,252
Other receivables 11,671 14,240
Notes receivable 5,828 1,851
Prepaid expenses and other current assets 1,742 6,167
Assets held for sale 123,220 --
----------- -----------
Total current assets 185,697 129,046
Property, plant and equipment, net 10,834 44,295
Notes receivable 7,642 7,831
Goodwill, net 65,701 93,880
Management services agreements, net 25,303 89,470
Investment in affiliates 1,451 4,944
Deferred tax asset 10,235 --
Other assets (including advances to shareholder) 11,633 8,694
----------- -----------
Total assets $ 318,496 $ 378,160
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of debt and capital leases $ 10,603 $ 13,742
Accounts payable 7,574 13,101
Accrued compensation 1,373 2,282
Accrued liabilities 8,691 13,531
----------- -----------
Total current liabilities 28,241 42,656
Long-term debt and capital leases, less current portion 4,727 20,617
Convertible subordinated debentures 100,000 100,000
Other long term liabilities 1,191 1,651
Minority interest 1,524 1,201
----------- -----------
Total liabilities 135,683 166,125
Commitments and contingencies
Shareholders' equity:
Common Stock, par value $.01; 40,000,000 shares authorized;
33,020,606 and 31,248,474 shares issued and outstanding at
October 31, 1998 and January 31, 1998, respectively 333 312
Treasury Stock (902) (75)
Additional paid in capital 224,731 198,893
Retained earnings (deficit) (41,349) 12,905
----------- -----------
Total shareholders' equity 182,813 212,035
----------- -----------
Total liabilities and shareholders' equity $ 318,496 $ 378,160
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- 3 -
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
--------------------- --------------------
1998 1997 1998 1997
--------- --------- -------- -------
<S> <C> <C> <C> <C>
Net revenues from services $ 43,494 $ 42,630 $ 144,256 $ 114,993
Net revenues from real estate services 571 6,654 8,616 17,382
Net revenues from management service agreements 39,033 42,284 126,535 117,969
--------- -------- --------- ---------
Total revenue 83,098 91,568 279,407 250,344
--------- -------- --------- ---------
Operating costs and administrative expenses:
Cost of affiliated physician management services 15,152 16,864 49,905 50,400
Salaries, wages and benefits 23,029 24,448 69,873 63,580
Professional fees 3,943 2,636 11,549 6,890
Supplies 15,016 11,980 44,047 31,881
Utilities 1,412 1,167 4,125 3,274
Depreciation and amortization 3,827 2,976 10,971 7,832
Rent 5,369 4,575 15,037 11,731
Provision for bad debts 2,393 923 4,282 3,238
Merger and other noncontinuing expenses -- 10,150 -- 11,057
Nonrecurring expenses -- -- 5,305 --
Gain on sale of assets 7 (1,193) (5,415) (1,891)
Provision for writedown of notes receivable 2,674 -- 2,674 --
Other (primarily capitation expense) 22,612 17,572 66,502 48,250
--------- -------- --------- ---------
Total operating costs and administrative expenses 95,434 92,098 278,855 236,242
--------- -------- --------- ---------
Interest expense, net 1,608 1,472 5,254 3,146
Income from investment in affiliates (154) (172) (588) (586)
--------- -------- --------- ---------
1,454 1,300 4,666 2,560
--------- -------- --------- ---------
Income (loss) before extraordinary item and provision for income taxes (13,790) (1,830) (4,114) 11,542
Income tax expense (benefit) (4,671) 2,539 (1,499) 7,085
--------- -------- --------- ---------
Net income (loss) before extraordinary item (9,119) (4,369) (2,615) 4,457
Extraordinary item, net of tax of $8,380 (Note 6) (51,552) -- (51,552) --
--------- -------- --------- ---------
Net income (loss) $ (60,671) $ (4,369) $ (54,167) $ 4,457
========= ======== ========= =========
Net income (loss) per share - basic
Income (loss) before extraordinary item $ (0.27) $ (0.15) $ (0.08) $ 0.15
Extraordinary item $ (1.54) $ -- $ (1.55) $ --
--------- -------- --------- ---------
Net income (loss) $ (1.81) $ (0.15) $ (1.63) $ 0.15
--------- -------- --------- ---------
Net income (loss) per share - diluted
Income (loss) before extraordinary item $ (0.27) $ (0.15) $ (0.08) $ 0.15
Extraordinary item $ (1.54) $ -- $ (1.55) $ --
--------- -------- --------- ---------
Net income (loss) $ (1.81) $ (0.15) $ (1.63) $ 0.15
--------- -------- --------- ---------
Pro forma information (Notes 3 and 5):
Adjustment to income tax expense 373 625
Net income (loss) (4,742) 3,832
Net income (loss) per weighted average share - basic $ (0.16) $ 0.13
Net income (loss) per weighted average share - diluted $ (0.16) $ 0.13
Weighted average shares outstanding - basic 33,548 29,917 33,245 29,331
========= ======== ========= =========
Weighted average shares outstanding - diluted 33,548 29,917 33,245 29,756
========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- 4 -
<PAGE>
PHYMATRIX CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
October 31,
----------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (54,167) $ 4,457
Noncash items included in net income:
Depreciation and amortization 10,971 7,833
Extraordinary item 49,444 --
Gain on sale of assets (5,415) (1,891)
Nonrecurring charge 4,401 --
Writedown of notes receivable 2,674 --
Other 1,463 147
Changes in receivables (3,074) (12,476)
Changes in accounts payable and accrued liabilities (5,403) 675
Changes in other assets (1,724) (2,991)
--------- ---------
Net cash used by operating activities (830) (4,246)
--------- ---------
Cash flows from investing activities:
Capital expenditures (4,556) (9,113)
Sale of assets 5,125 3,011
Advances under notes receivable (2,028) (3,456)
Repayments of notes receivable -- 10,000
Other assets (109) (515)
Acquisitions, net of cash acquired (10,958) (33,355)
--------- ---------
Net cash used by investing activities (12,526) (33,428)
--------- ---------
Cash flows from financing activities:
Advances to shareholder (3,116) --
Proceeds from issuance of common stock 130 743
Repurchase of treasury stock (497) --
Proceeds from issuance of debt -- 12,022
Release of cash collateral -- 4,504
Offering costs and other (215) (37)
Payment of dividends -- (1,760)
Repayment of debt (8,245) (7,266)
--------- ---------
Net cash provided (used) by financing activities (11,943) 8,206
--------- ---------
Decrease in cash and cash equivalents $ (25,299) $ (29,468)
========= =========
Cash and cash equivalents, beginning of period $ 49,536 $ 81,650
========= =========
Cash and cash equivalents, end of period $ 24,237 $ 52,182
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- 5 -
<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended October 31, 1998 and 1997 (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. 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. 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. These interim financial statements
should be read in conjunction with the audited financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
January 31, 1998. Operating results for the three and nine months ended October
31, 1998 are not necessarily indicative of results that may be expected for the
year.
2. Strategic Alternatives
During May 1998, the Company announced that the Board of Directors had
instructed management to explore various strategic alternatives for the Company
that could maximize shareholder value, including possible mergers, asset sales,
management buy back, other business combinations or strategic transactions.
During July 1998, the Company hired an investment banker in conjunction with its
decision to pursue strategic alternatives. During August 1998, the Company's
Board of Directors approved several strategic alternatives to enhance
stockholder value. The Board authorized a series of initiatives designed to
establish the Company as a significant company in pharmaceutical contract
research, specifically clinical trials site management and outcomes research.
The Company will link its nationally focused hospital affiliations and its 92
physician networks with the clinical trials site management and healthcare
outcomes research operations.
During August 1998, the Board also approved, consistent with achieving its
stated restructuring goal, its plan to divest and exit its physician practice
management ("PPM") business and certain of its ancillary services businesses,
including diagnostic imaging, lithotripsy, and radiation therapy. The revenue
and pretax income of these businesses which have been identified to be divested
or disposed for the three and nine months ended October 31, 1998 were $47.0
million and $0.1 million and $147.2 million and $7.8 million, respectively. Net
loss for the three and nine months ended October 31, 1998 includes an
extraordinary item of $51.6 million which represents the charge resulting from
divestitures or disposals that had occurred during the three months ended
October 31, 1998 as well as the writedown of the assets of businesses identified
to be divested or disposed subsequent to October 31, 1998. In accordance with
APB 16, the Company is required to record these charges as an extraordinary item
since impairment losses are being recognized for divestitures and disposals
expected to be completed within two years subsequent to a pooling of interests
(the pooling of interests with CSL was effective October 15, 1997). The Company
currently expects to realize net proceeds of approximately $123.2 million from
the sale of the businesses identified to be divested or disposed and has
recorded this amount as an asset held for sale on the balance sheet at October
31, 1998.
-6-
<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended October 31, 1998 and 1997 (Unaudited)
3. Acquisitions and CSL Merger
Acquisitions
During February 1998, the Company purchased New England Research Center.
Located in Massachusetts, New England Research Center is a clinical research
site with over 50 ongoing studies, primarily in allergy and asthma. In
conjunction with the acquisition, the Company entered into a 40-year agreement
with the physicians and employees to manage the clinical trials at New England
Research Center. The purchase price was approximately $5,700,000. Of such
purchase price, approximately $1,450,000 was paid in cash and 333,006 shares of
Common Stock were issued having a value of $4,250,000. The purchase price was
allocated primarily to management services agreements and is currently being
amortized over 25 years.
During February 1998, the Company completed the formation of an MSO with
Beth Israel Medical Center and the physician organizations that represent more
than 1,700 physicians of Beth Israel and its parent corporation. The Company
owns one-third of the MSO. The Company provides management services for the MSO
which provides the physicians and hospitals with medical management and contract
negotiation support for risk agreements with managed care payors. In connection
with the formation of the MSO, PhyMatrix Management Company, Inc.
("Management"), a subsidiary of the Company, agreed with Beth Israel Medical
Center ("Beth Israel") that Management and its affiliates (including the
Company) would not, directly or indirectly, (i) operate, manage or provide risk
contract management services to any physicians, IPAs or group practices located
in New York County, Kings County or Westchester County, New York (the
"Restricted Zone") which are affiliated with a hospital or hospital system or
any affiliate (with certain exceptions) or (ii) participate with a hospital or
hospital system or any affiliate (other than Beth Israel) in an MSO or other
person that operates, manages or provides risk contract management services
within the Restricted Zone (with certain exceptions). In addition, the owners of
two-thirds of the MSO have the right to require the Company to purchase their
interests at the option price, which is based upon earnings, during years six
and seven.
During February 1998, the Company purchased a diagnostic imaging center
located in Delray Beach, Florida. The base purchase price was approximately
$6,570,000. The base purchase price was paid in 495,237 shares of Common Stock
of the Company. There is also a contingent payment up to a maximum of $2,000,000
based on the center's earnings before taxes during 1998, which is payable in
cash and/or Common Stock of the Company. The purchase price was allocated to the
assets at fair market value including goodwill of $6,570,000. The resulting
intangible has been amortized over 25 years. At October 31, 1998 the Company has
recorded the estimated net realizable value of this business as assets held for
sale.
During March 1998, the Company entered into an administrative services
agreement with HIA Bensonhurst Imaging Associates, LLP, a diagnostic imaging
center in Brooklyn, New York. The consideration paid was approximately
$5,100,000 of Common Stock. There is also a contingent payment up to a maximum
of $1,900,000 based on the center's earnings before taxes, which is payable in
cash and/or Common Stock of the Company. The purchase price was allocated to the
assets at fair market value including management services agreements of
$4,720,000. The resulting intangible has been amortized over 25 years. At
October 31, 1998 the Company has recorded the estimated net realizable value of
this business as assets held for sale.
During April 1998, the Company completed the formation of an MSO, which is
51% owned by the Company, with LIPH, LLC. The Company manages for the MSO the
medical risk contracting for the more than 2,600 physicians in IPAs in New York.
The base purchase price was $2,970,000. Of such price, $1,470,000 was paid in
cash and 143,026 shares of Common Stock were issued having a value of
$1,500,000. There are also contingent payments up to a maximum of $5,000,000
payable in cash and Common Stock, with $4,000,000 of such amount
- 7 -
<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended October 31, 1998 and 1997 (Unaudited)
based upon earnings during the three years after the closing date and the
remaining $1,000,000 based upon the achievement of certain conditions during any
twelve-month period during the three years after the closing date. The base
purchase price was allocated primarily to goodwill and is being amortized over
25 years.
During April 1998, the Company acquired the business and certain assets of
a clinical research company in Massachusetts. The base purchase price was
$2,640,000 plus the assumption of liabilities of approximately $425,000. Of such
purchase price, $1,500,000 was paid in 144,405 shares of Common Stock of the
Company, $70,000 is payable in shares of Common Stock on the first anniversary
of the closing date and $1,070,000 is payable in shares of Common Stock of the
Company on the second anniversary of the closing date. In addition, there is a
contingent payment up to a maximum of $2,350,000 payable in Common Stock based
on earnings before taxes during the next four years. The purchase price was
allocated to the assets at fair market value including goodwill of $2,655,000.
The resulting intangible is being amortized over 20 years.
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. As a result of the merger, certain
costs that were incurred by CSL are noncontinuing. During the three and nine
months ended October 31, 1997, the merger and other noncontinuing costs
represented merger costs incurred in connection with the acquisition of CSL and
management fees paid to the principal shareholders of CSL.
The following table reflects in the As Reported column, the restated
consolidated net revenues, merger and other noncontinuing costs, net income, net
income per share and weighted average number of shares outstanding for the
indicated periods. The Pro Forma 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
column adjusts the Pro Forma column by eliminating merger costs and certain
noncontinuing charges incurred by CSL.
- 8 -
<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended October 31, 1998 and 1997 (Unaudited)
<TABLE>
<CAPTION>
(B)
(A) Adjusted
As Reported Pro Forma Pro Forma
--------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
FOR THE THREE MONTHS ENDED OCTOBER 31, 1997
Net revenue $ 91,568 $ 91,568 $ 91,568
Merger and other noncontinuing costs 10,150 10,150 --
Net income (4,369) (4,742) 5,408
Net income per share - basic $ (0.15) $ (0.16) $ 0.18
Net income per share - diluted $ (0.15) $ (0.16) $ 0.18
Weighted average number of shares outstanding - basic 29,917 29,917 29,917
Weighted average number of shares outstanding - diluted 29,917 29,917 29,917
FOR THE NINE MONTHS ENDED OCTOBER 31, 1997
Net revenue $ 250,344 $ 250,344 $ 250,344
Merger and other noncontinuing costs 11,057 11,057 --
Net income 4,457 3,832 14,526
Net income per share - basic $ 0.15 $ 0.13 $ 0.50
Net income per share - diluted $ 0.15 $ 0.13 $ 0.49
Weighted average number of shares outstanding - basic 29,331 29,331 29,331
Weighted average number of shares outstanding - diluted 29,756 29,756 29,756
</TABLE>
(A) Adjusts the As Reported results for CSL to reflect the operations of CSL as
if CSL had been a C corporation rather than an S corporation for income tax
purposes.
(B) Adjusts the As Reported results by eliminating CSL merger expenses and
certain noncontinuing costs of CSL and providing for income tax expense as
if CSL had been a C corporation rather than an S corporation for income tax
purposes.
4. Supplemental Cash Flow Information
During the nine months ended October 31, 1998 and 1997, the Company
acquired the assets and/or stock, entered into management and employment
agreements, and/or assumed certain liabilities of various physician practices,
ancillary service companies, networks and organizations. In addition, during the
nine months ended October 31, 1998 and 1997, the Company issued shares of stock
which had been committed to be issued in conjunction with acquisitions completed
during the year ended January 31, 1998 and sold certain assets. During the nine
months ended October 31, 1998, the Company also terminated several physician
management and employment agreements, wrote down certain notes receivable to
their estimated net realizable value and wrote down certain assets to be held
for sale to their net realizable value (less cost to sell). The transactions had
the following non-cash impact on the balance sheets of the Company as of the
indicated dates:
- 9 -
<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended October 31, 1998 and 1997 (Unaudited)
<TABLE>
<CAPTION>
October 31,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Current assets $ 73,465 $ 8,261
Property, plant and equipment (33,418) 1,201
Intangibles (86,138) 59,332
Other noncurrent assets 7,958 1,092
Current liabilities (7,063) (891)
Noncurrent liabilities (196) 18,616
Debt (10,784) (5,833)
Equity (27,216) 27,649
</TABLE>
5. Pro Forma Information
Prior to the CSL merger, CSL was treated as an 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.
6. Assets Held for Sale/Extraordinary Item
During August 1998, the Company initiated its plan to divest and exit its
PPM business and certain of its ancillary services businesses, including
diagnostic imaging, lithotripsy, and radiation therapy. The revenue and pretax
income of these businesses which have been identified to be divested or disposed
for the three and nine months ended October 31, 1998 were $47.0 million and $0.1
million and $147.2 million and $7.8 million, respectively. Net loss for the
three and nine months ended October 31, 1998 includes an extraordinary item of
$51.6 million which represents the charge resulting from divestitures or
disposals that had occurred during the three months ended October 31, 1998 as
well as the writedown of the assets of businesses identified to be divested or
disposed subsequent to October 31, 1998. In accordance with APB 16, the Company
is required to record these charges as an extraordinary item since impairment
losses are being recognized for divestitures and disposals expected to be
completed within two years subsequent to a pooling of interests (the pooling of
interests with CSL was effective October 15, 1997). At October 31, 1998, the
remaining carrying amount of the businesses identified to be divested or
disposed was $123.2 million.
- 10 -
<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended October 31, 1998 and 1997 (Unaudited)
7. Nonrecurring Charge
During the second quarter ended July 31, 1998, the Company terminated
several of its physician management and employment agreements which resulted in
a pretax charge of approximately $5.3 million. The charge is composed primarily
of the write-off of the remaining intangible assets as well as severance and
legal costs.
8. Gain on Sale of Assets
During the nine months ended October 31, 1998 the Company sold real estate
and a radiation therapy center for $7.8 and $2.5 million, respectively. These
sales resulted in gains of $4.5 million and $0.9 million, respectively. In
connection with the sale of real estate, $2.6 million was paid in cash and the
Company recorded a note receivable for the balance of $5.2 million. The note
bears interest at 9.5% and has a final maturity of August 2008. During the nine
months ended October 31, 1997 the gain on sale of assets resulted primarily from
the sale of a radiation therapy center and real estate. Proceeds from these
sales were $1.5 million and $3.1 million (including a $1.7 million note
receivable), respectively. These sales resulted in gains of $0.7 million and
$1.3 million, respectively.
9. Provision for Writedown of Notes Receivable
During the third quarter ended October 31, 1998, the Company wrote down
certain notes receivable that were collateralized by shares of Common Stock of
the Company to their estimated net realizable value. In the case of one such
note receivable the shares of Common Stock were tendered to the Company and
accordingly the Company recorded the shares as treasury stock. Based on the
estimated net realizable value of the notes receivable, the Company recorded a
pretax charge of approximately $2.7 million.
10. Net Income per Share
The following is a reconciliation of the numerators and denominators of the
basic and fully diluted earnings per share computations for net income:
- 11 -
<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended October 31, 1998 and 1997 (Unaudited)
<TABLE>
<CAPTION>
Per Share
(In thousands, except per share data) Income Shares Amount
------------- ------------- -------------
Three Months Ended October 31, 1998
- -----------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share
Loss available to common stockholders $ (9,119) 33,548 $ (0.27)
Extraordinary item (51,552) -- (1.54)
--------- -------- --------
Net loss available to common stockholders (60,671) 33,548 $ (1.81)
Effect of dilutive securities -- -- --
--------- -------- --------
Diluted earnings per share $ (60,671) 33,548 $ (1.81)
========== ======== ========
Three Months Ended October 31, 1997
- -----------------------------------------------------------
Basic earnings per share
Net loss available to common stockholders $ (4,369) 29,917 $ (0.15)
Effect of dilutive securities -- -- --
--------- -------- --------
Diluted earnings per share $ (4,369) 29,917 $ (0.15)
========= ======== ========
Nine Months Ended October 31, 1998
- -----------------------------------------------------------
Basic earnings per share
Loss available to common stockholders $ (2,615) 33,245 $ (0.08)
Extraordinary item $ (51,552) -- $ (1.55)
--------- -------- --------
Net loss available to common stockholders $ (54,167) 33,245 $ (1.63)
Effect of dilutive securities -- -- --
--------- -------- --------
Diluted earnings per share $ (54,167) 33,245 $ (1.63)
========== ======== ========
Nine Months Ended October 31, 1997
- -----------------------------------------------------------
Basic earnings per share
Net loss available to common stockholders $ 4,457 29,331 $ 0.15
Effect of dilutive securities
Stock options -- 155 --
Convertible debt 96 270 --
--------- -------- --------
Diluted earnings per share $ 4,553 29,756 $ 0.15
========= ======== ========
</TABLE>
- 12 -
<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended October 31, 1998 and 1997 (Unaudited)
For the three and nine months ended October 31, 1998 and 1997, no related
adjustments to income were made for the common stock equivalents related to the
Debentures since the effect would be antidilutive. For the three and nine months
ended October 31, 1998 and the three months ended October 31, 1997 no potential
common shares were included in calculating diluted earnings per share due to the
fact that there were losses from continuing operations and therefore the effect
would be antidilutive.
11. Ratio of Earnings to Fixed Charges
For the three and nine months ended October 31, 1998, the ratio of earnings
to fixed charges was less than 1.0. For purposes of computing the ratio of
earnings to fixed charges, earnings represent income (loss) from operations
before minority interest and income taxes, plus fixed charges. Earnings also
includes the equity in less-than-fifty-percent-owned investments 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 three and nine months ended October 31, 1998 for purposes of computing the
ratio of earnings to fixed charges, the Company's earnings were inadequate to
cover fixed charges by $13.9 million and $4.4 million, respectively.
12. Accounting Changes and Pronouncements
Effective February 1, 1998, management changed its policies regarding
amortization of its management services agreement intangible assets. The Company
adopted a maximum of 25 years (from the inception of the respective intangible
asset) as the useful life for amortization of its management services agreement
intangible assets. Using the unamortized portion of the intangible at January
31, 1998, the Company began amortizing the intangible over the remainder of the
25 year useful life. These costs had historically been charged to expense
through amortization using the straight line method over the periods during
which the agreements are effective, generally 30 to 40 years. This change
represented a change in accounting estimate and, accordingly, does not require
the Company to restate reported results for prior years. This change increased
amortization expense relating to existing intangible assets at January 31, 1998,
by approximately $740,000 annually.
In 1997, the Emerging Issues Task Force of the Financial Accounting
Standards Board issued EITF 97-2 concerning the consolidation of physician
practice revenues. Physician practice management companies ("PPMs") will be
required to consolidate financial information of a physician where the PPM
acquires a "controlling financial interest" in the practice through the
execution of a contractual management agreement even though the PPM does not own
a controlling equity interest in the physician practice. EITF 97-2 outlines six
requirements for establishing a controlling financial interest. The Company will
adopt EITF 97-2 in the fourth quarter of this fiscal year. The Company does not
believe that the implementation of EITF 97-2 will have a material impact on its
financial condition or its earnings. During August 1998, the Company announced
its plan to divest and exit the PPM business. The majority of these assets are
recorded as assets held for sale at October 31, 1998. However, the impact of
this statement would have resulted in a reduction of reported revenues and
expenses for the three and nine months ended October 31, 1998, by a maximum of
$15.2 million and $49.9 million, respectively. The Company has implemented EITF
97-2 for all transactions occurring after November 20, 1997.
The FASB recently issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which is effective for the Company's
financial statements as of and for the year ending January 31, 1999. This
Statement requires reporting of summarized financial results for operating
segments as well as established standards for related disclosures about products
and services, geographic areas and major customers. Primary disclosure
requirements include total segment revenues, total segment profit or loss and
total segment
- 13 -
<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended October 31, 1998 and 1997 (Unaudited)
assets. The Company has not yet completed its evaluation of the impact of this
Statement on the Company's financial statements.
13. Legal Proceedings
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 may be forced to renegotiate those provisions of
the contracts which are 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 provisions on acceptable terms. The majority of the contracts affected by
this ruling are with the physician practices the Company has identified to be
divested or disposed and for which the assets are included in assets held for
sale at October 31, 1998.
14. Reclassification
Certain prior period amounts have been reclassified to conform to the
current period presentation.
15. Subsequent Events
During December 1998, Robert A. Miller resigned as President and a member
of the Board of Directors of the Company. In addition, during December 1998, the
Company and Robert A. Miller entered into a Separation and Severance agreement
(the "Miller Severance Agreement") and a Consulting Agreement for Physician
Practice Management Assets (the "Miller Consulting Agreement"). Pursuant to the
Miller Severance Agreement, the Company is required to pay Mr. Miller a
severance payment equal to $617,528, which will be recorded as severance expense
during the fourth quarter ended January 31, 1999. Mr. Miller agreed not to
solicit any employees of the Company and not to compete against the Company for
a period of two years from the termination of the Miller Consulting Agreement.
The Miller Consulting Agreement provides for Mr. Miller to assist the Company in
its divestiture of certain assets held for sale. In consideration for such
services, the Company is required to pay to Mr. Miller $390,000.
During December 1998, the Company announced that Michael Heffernan will
assume the role of President of the Company. Mr. Heffernan has been a Director
of the Company since October 1997 and Chief Executive Officer of CSL since 1995.
In September 1997, the Company entered into a secured credit agreement with
a bank providing for a $100 million revolving line of credit ($16.0 million of
which was outstanding at October 31, 1998, $6.0 million of such $16.0 million
outstanding was for letters of credit) for working capital and acquisition
purposes. The existing 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 which include minimum net
cash flow requirements. The existing credit agreement currently provides that
loans made under the credit agreement may only be used for acquisitions approved
by the lenders. The Company has recently negotiated an amendment to its credit
agreement. The amended credit agreement provides a $25 million revolving line of
credit for working capital with availability based upon a borrowing base
comprised of fixed assets and accounts receivable. The line matures in March
1999. Twenty-five percent of the proceeds from asset sales will be required to
be used to repay the line.
During December 1998, the Company granted options to purchase approximately
650,000 shares of common stock of the Company to its non-officer employees. The
options were granted at $4.00 per share and generally vest over three years and
expire 10 years after the date of grant. Of the 650,000 options granted to its
non-officer employees, 260,000 represent a repricing of 205,000 options that
were previously granted at prices ranging from $10.13 to $19.00.
- 14 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
Until August 1998 (see "Recent Events"), the Company has been an integrated
medical management company that provides management services to the medical
community. The Company has also provided real estate development and consulting
services to related and unrelated third parties for the development of medical
malls, medical office buildings, and health parks. The Company had previously
affiliated with physicians by acquiring their practices and entering into
long-term management agreements with the acquired practices. The Company also
affiliates with physicians by managing independent physician associations
("IPAs") and specialty care physician networks through management service
organizations ("MSOs") in which the Company has ownership interests. The Company
also provides ancillary services including radiation therapy, diagnostic
imaging, infusion therapy, home healthcare, lithotripsy services, ambulatory
surgery and clinical research studies. As of October 31, 1998, the Company
remains affiliated through long-term agreements with approximately 342
physicians; has obtained interests in MSOs in Connecticut, Georgia, New Jersey,
New York and Florida that provide management services to IPAs composed of over
approximately 8,000 multispecialty physicians; purchased a company that provides
contract management services to approximately 4,000 physicians in specialty care
networks; purchased Clinical Studies Ltd. ("CSL"), a site management
organization conducting clinical research for pharmaceutical companies and
clinical research organizations at 35 centers located in 15 states; and acquired
several ancillary services companies and a company that provides real estate
services.
In January 1996, the Company changed its fiscal year end from December 31
to January 31.
Recent Events
During May 1998, the Company announced that the Board of Directors had
instructed management to explore various strategic alternatives for the Company
that could maximize shareholder value, including possible mergers, asset sales,
management buy back, other business combinations or strategic transactions.
During July 1998, the Company hired an investment banker in conjunction with its
decision to pursue strategic alternatives. During August 1998, PhyMatrix Corp.
announced that the Company's Board of Directors approved several strategic
alternatives to enhance stockholder value. The Board authorized a series of
initiatives designed to establish the Company as a significant company in
pharmaceutical contract research, specifically clinical trials site management
and outcomes research. The Company will link its nationally focused hospital
affiliations and its 92 physician networks with the clinical trials site
management and healthcare outcomes research operations.
During August 1998, the Board also approved, consistent with achieving its
stated restructuring goal, its plan to divest and exit its physician practice
management ("PPM") business and certain of its ancillary services businesses,
including diagnostic imaging, lithotripsy, and radiation therapy. The revenue
and pretax income of these businesses which have been identified to be divested
or disposed for the three and nine months ended October 31, 1998 were $47.0
million and $0.1 million and $147.2 million and $7.8 million, respectively. Net
loss for the three and nine months ended October 31, 1998 includes an
extraordinary item of $51.6 million which represents the charge resulting from
divestitures or disposals that had occurred during the three months ended
October 31, 1998 as well as the writedown of the assets of businesses identified
to be divested or disposed subsequent to October 31, 1998. In accordance with
APB 16, the Company is required to record these charges as an extraordinary item
since impairment losses are being recognized for divestitures and disposals
expected to be completed within two years subsequent to a pooling of interests
(the pooling of interests with CSL was effective October 15, 1997). The Company
currently expects to realize net proceeds of approximately $123.2 million from
the sale of the businesses identified to be divested or disposed and has
recorded this amount as an asset held for sale on the balance sheet at October
31, 1998.
- 15 -
<PAGE>
Acquisitions and CSL Merger
Nine Months Ended October 31, 1998 Acquisitions
During February 1998, the Company purchased New England Research Center.
Located in Massachusetts, New England Research Center is a clinical research
site with over 50 ongoing studies, primarily in allergy and asthma. In
conjunction with the acquisition, the Company entered into a 40-year agreement
with the physicians and employees to manage the clinical trials at New England
Research Center. The purchase price was approximately $5,700,000. Of such
purchase price, approximately $1,450,000 was paid in cash and 333,006 shares of
Common Stock were issued having a value of $4,250,000. The purchase price was
allocated primarily to management services agreements and is currently being
amortized over 25 years.
During February 1998, the Company completed the formation of an MSO with
Beth Israel Medical Center and the physician organizations that represent more
than 1,700 physicians of Beth Israel and its parent corporation. The Company
owns one-third of the MSO. The Company provides management services for the MSO
which provides the physicians and hospitals with medical management and contract
negotiation support for risk agreements with managed care payors. In connection
with the formation of the MSO, PhyMatrix Management Company, Inc.
("Management"), a subsidiary of the Company, agreed with Beth Israel Medical
Center ("Beth Israel") that Management and its affiliates (including the
Company) would not, directly or indirectly, (i) operate, manage or provide risk
contract management services to any physicians, IPAs or group practices located
in New York County, Kings County or Westchester County, New York (the
"Restricted Zone") which are affiliated with a hospital or hospital system or
any affiliate (with certain exceptions) or (ii) participate with a hospital or
hospital system or any affiliate (other than Beth Israel) in an MSO or other
person that operates, manages or provides risk contract management services
within the Restricted Zone (with certain exceptions). In addition, the owners of
two-thirds of the MSO have the right to require the Company to purchase their
interests at the option price, which is based upon earnings, during years six
and seven.
During February 1998, the Company purchased a diagnostic imaging center
located in Delray Beach, Florida. The base purchase price was approximately
$6,570,000. The base purchase price was paid in 495,237 shares of Common Stock
of the Company. There is also a contingent payment up to a maximum of $2,000,000
based on the center's earnings before taxes during 1998, which is payable in
cash and/or Common Stock of the Company. The purchase price was allocated to the
assets at fair market value including goodwill of $6,570,000. The resulting
intangible has been amortized over 25 years. At October 31, 1998 the Company has
recorded the estimated net realizable value of this business as assets held for
sale.
During March 1998, the Company entered into an administrative services
agreement with HIA Bensonhurst Imaging Associates, LLP, a diagnostic imaging
center in Brooklyn, New York. The consideration paid was approximately
$5,100,000 of Common Stock. There is also a contingent payment up to a maximum
of $1,900,000 based on the center's earnings before taxes, which is payable in
cash and/or Common Stock of the Company. The purchase price was allocated to the
assets at fair market value including management services agreements of
$4,720,000. The resulting intangible has been amortized over 25 years. At
October 31, 1998 the Company has recorded the estimated net realizable value of
this business as assets held for sale.
During April 1998, the Company completed the formation of an MSO, which is
51% owned by the Company, with LIPH, LLC. The Company manages for the MSO the
medical risk contracting for the more than 2,600 physicians in IPAs in New York.
The base purchase price was $2,970,000. Of such price, $1,470,000 was paid in
cash and 143,026 shares of Common Stock were issued having a value of
$1,500,000. There are also contingent payments up to a maximum of $5,000,000
payable in cash and Common Stock, with $4,000,000 of such amount based upon
earnings during the three years after the closing date and the remaining
$1,000,000 based upon the achievement of certain conditions during any twelve
month period during the three years after the closing date. The base purchase
price was allocated primarily to goodwill and is being amortized over 25 years.
During April 1998, the Company acquired the business and certain assets of
a clinical research company in Massachusetts. The base purchase price was
$2,640,000 plus the assumption of liabilities of approximately $425,000. Of such
purchase price, $1,500,000 was paid in 144,405 shares of Common Stock of the
Company,
- 16 -
<PAGE>
$70,000 is payable in shares of Common Stock on the first anniversary of the
closing date and $1,070,000 is payable in shares of Common Stock of the Company
on the second anniversary of the closing date. In addition, there is a
contingent payment up to a maximum of $2,350,000 payable in Common Stock based
on earnings before taxes during the next four years. The purchase price was
allocated to the assets at fair market value including goodwill of $2,655,000.
The resulting intangible is being amortized over 20 years.
Year Ended January 31, 1998 Acquisitions (all information related to the number
of physicians is as of the acquisition date)
Physician Practices
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. At October 31, 1998 the
Company has recorded the estimated net realizable value of this business as
assets held for sale.
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 services agreements of $1,364,482. The resulting intangible
has been amortized over 25 years. At October 31, 1998 the Company has recorded
the estimated net realizable value of this business as assets held for sale.
During May 1997, the Company entered into a 40-year management agreement
with a radiation therapy center in Westchester, New York. The consideration paid
in this transaction was $2,550,000. The amount paid has been allocated to
management services agreements and has been amortized over 25 years. At October
31, 1998 the Company has recorded the estimated net realizable value of this
business as assets held for sale.
During July 1997, the Company entered into a 40-year 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. Pursuant to this management services agreement, the Company is reimbursed
for all operating expenses incurred by the Company for the provision of services
to the practices plus its applicable management fee. 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 $13,660,000 in cash, which was
allocated to management services agreements and is currently being amortized
over 25 years.
Ancillary Service Companies and CSL Merger
During April 1997, the Company acquired the business and certain assets of
a clinical research company in the Washington, DC 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
intangibles, including goodwill, and is being amortized over 20 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
$12,600,000 plus the assumption of debt and capital leases totaling $1,570,000.
Of such purchase price, $600,000 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. There is also a contingent payment with a maximum of $2,675,000
based on the centers' earnings before taxes over the two years subsequent to the
closing, which is payable in cash. During September 1998, the Company paid
$1,337,500 of such contingent payment in cash and has accrued for the remaining
$1,337,500 at October 31, 1998. The purchase price was allocated to the assets
at
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<PAGE>
their fair market value, including goodwill of $12,955,273. The resulting
intangible has been amortized over 30 years. At October 31, 1998 the Company has
recorded the estimated net realizable value of this business as assets held for
sale.
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 has
been amortized over 20 years. At October 31, 1998 the Company has recorded the
estimated net realizable value of this business as assets held for sale.
During August 1997, the Company purchased certain assets and assumed
certain liabilities of, and entered into an administrative services agreement
with BAB Nuclear Radiology, P.C., to provide administrative services to five
diagnostic imaging centers on Long Island, New York. The consideration paid in
this transaction was approximately $10,450,000 in cash, $15,000,000 in
convertible notes and the assumption of $1,621,000 in debt. The convertible
notes bear interest at 5% and are payable in three equal installments in
November 1997 and February and May 1998. At the option of the Company, the notes
are payable in either cash or shares of Common Stock of the Company. The first
two installments were paid in shares of Common Stock of the Company and the
final installment was paid in cash during May 1998. The amount paid was
allocated to the assets at their fair market value, including management
services agreements of $23,023,256 and has been amortized over 25 years. At
October 31, 1998 the Company has recorded the estimated net realizable value of
this business as assets held for sale.
During November 1997, the Company purchased certain assets of, and entered
into an administrative services agreement with Highway Imaging Associates, LLP,
to provide administrative services to a diagnostic imaging center in Brooklyn,
New York. The consideration paid in this transaction was approximately
$1,700,000. Of such amount, approximately $200,000 was paid in cash and
$1,500,000 was paid by the issuance of 108,108 shares of Common Stock of the
Company. The amount paid was allocated to the assets at their fair market value,
including management services agreements of $1,598,421, and has been amortized
over 25 years. At October 31, 1998 the Company has recorded the estimated net
realizable value of this business as assets held for sale.
During December 1997, the Company purchased certain assets, assumed certain
liabilities of, and entered into an administrative services agreement with Ray-X
Management Services, Inc., to provide administrative services to a diagnostic
imaging center in Queens, New York. The consideration paid in this transaction
was approximately $9,500,000. Of such amount, approximately $175,000 was paid in
cash, $775,000 was assumed debt and $8,550,000 was paid by the issuance of
616,215 shares of Common Stock of the Company. The amount paid was allocated to
the assets at their fair market value, including management services agreements
of $8,133,680, and has been amortized over 25 years. At October 31, 1998 the
Company has recorded the estimated net realizable value of this business as
assets held for sale.
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. As a result of the merger certain
costs incurred by CSL will be noncontinuing. During the three and nine months
ended October 31, 1997, the merger and other noncontinuing costs represented
merger costs incurred in conjunction with the acquisition of CSL and management
fees paid to the principal shareholders of CSL.
The following table reflects in the As Reported column the restated
consolidated net revenues, merger and other noncontinuing costs, net income, net
income per share and weighted average number of shares outstanding for the
indicated periods. The Pro Forma 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
column adjusts the Pro Forma column by eliminating merger costs and certain
noncontinuing charges incurred by CSL.
- 18 -
<PAGE>
<TABLE>
<CAPTION>
(B)
(A) Adjusted
As Reported Pro Forma Pro Forma
--------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
FOR THE THREE MONTHS ENDED OCTOBER 31, 1997
Net revenue $ 91,568 $ 91,568 $ 91,568
Merger and other noncontinuing costs 10,150 10,150 --
Net income (4,369) (4,742) 5,408
Net income per share - basic $ (0.15) $ (0.16) $ 0.18
Net income per share - diluted $ (0.15) $ (0.16) $ 0.18
Weighted average number of shares outstanding - basic 29,917 29,917 29,917
Weighted average number of shares outstanding - diluted 29,917 29,917 29,917
FOR THE NINE MONTHS ENDED OCTOBER 31, 1997
Net revenue $ 250,344 $ 250,344 $ 250,344
Merger and other noncontinuing costs 11,057 11,057 --
Net income 4,457 3,832 14,526
Net income per share - basic $ 0.15 $ 0.13 $ 0.50
Net income per share - diluted $ 0.15 $ 0.13 $ 0.49
Weighted average number of shares outstanding - basic 29,331 29,331 29,331
Weighted average number of shares outstanding - diluted 29,756 29,756 29,756
</TABLE>
(A) Adjusts the As Reported results for CSL to reflect the operations of CSL as
if CSL had been a C corporation rather than an S corporation for income tax
purposes.
(B) Adjusts the As Reported results by eliminating CSL merger expenses and
certain noncontinuing costs of CSL and providing for income tax expense as
if CSL had been a C corporation rather than an S corporation for income tax
purposes.
Contract Management Acquisitions
During April 1997, the Company acquired a pulmonary physician network
company for a base purchase price of $3,049,811. Of such purchase price,
$756,964 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 three years subsequent to the closing, which will be
paid in cash and/or Common Stock of the Company. During May 1998, the Company
issued 88,149 shares of Common Stock of the Company having a value of $1,055,592
representing a portion of the aforementioned contingent payment. The purchase
price was allocated to goodwill and is being amortized over 30 years.
During December 1997 the Company purchased the stock of Urology Consultants
of South Florida. The base purchase price was approximately $3,555,000, paid in
244,510 shares of Common Stock of the Company. There is also a contingent
payment up to a maximum of $2,000,000 based on the acquired entities' earnings
before taxes during the three years subsequent to the closing, 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
$3,555,000. The resulting goodwill is being amortized over 30 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 services
agreements, and employment and consulting agreements. Through the asset and/or
stock purchase agreement, the Company acquired 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
typically were purchased at the net realizable value. The purchase price of the
practice generally consisted 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.
- 19 -
<PAGE>
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. Included in net revenues from
services are revenues from the diagnostic imaging centers in New York which the
Company operates pursuant to Administrative Service Agreements.
Net revenue from management services agreements include the revenues
generated by the physician practices. The Company, in most cases, 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 most 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. In 1997, the
Emerging Issues Task Force of the Financial Accounting Standards Board issued
EITF 97-2 concerning the consolidation of physician practice revenues. Physician
practice management companies ("PPMs") will be required to consolidate financial
information of a physician where the PPM acquires a "controlling financial
interest" in the practice through the execution of a contractual management
agreement even though the PPM does not own a controlling equity interest in the
physician practice. EITF 97-2 outlines six requirements for establishing a
controlling financial interest. The Company will adopt EITF 97-2 in the fourth
quarter of this fiscal year. The Company does not believe that the
implementation of EITF 97-2 will have a material impact on its financial
condition or its earnings. During August 1998, the Company announced its plan to
divest and exit the PPM business. The Company is currently working to complete
these divestitures and the majority of these assets are recorded as assets held
for sale at October 31, 1998. However, the impact of this statement would have
resulted in a reduction of reported revenues and expenses for the three and nine
months ended October 31, 1998, by a maximum of $15.2 million and $49.9 million,
respectively. The Company has implemented EITF 97-2 for all transactions
occurring after November 20, 1997. Net revenues under management services
agreements for the three and nine months ended October 31, 1998, were $39.0
million and $126.5 million, respectively.
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<PAGE>
Results of Operations
Three and Nine Months Ended October 31, 1998 Compared to Three and Nine Months
Ended October 31, 1997
The following discussion reviews the results of operations for the three
and nine months ended October 31, 1998 (the "1999 Quarter" and "1999 Period"),
respectively, compared to the three and nine months ended October 31, 1997 (the
"1998 Quarter" and "1998 Period"), respectively.
Revenues
The Company derives revenues from health care services and real estate
services. Within the health care segment, the Company distinguishes between
revenues from cancer services, noncancer physician services and other ancillary
services. Cancer services include physician practice management services to
oncology practices and certain ancillary services, including radiation therapy
and infusion therapy. Noncancer physician services include physician practice
management services to all practices managed by the Company other than oncology
practices; management services to MSOs and hospitals and administrative services
to health plans which include reviewing, processing, and paying claims and
subcontracting with specialty care physicians to provide covered services. Other
ancillary services include home health care services, lithotripsy, various
health care management services, diagnostic imaging, ambulatory surgery, and
clinical research studies.
Net revenues were $83.1 million and $279.4 million for the 1999 Quarter and
1999 Period, respectively. Of this amount, $27.5 million and $86.8 million or
33.1% and 31.1% of such revenues was attributable to cancer services; $37.6
million and $122.5 million or 45.3% and 43.8% was related to noncancer physician
services; $17.4 million and $61.5 million or 20.9% and 22.0% of such revenues
was attributable to other ancillary services; and $0.6 million and $8.6 million
or 0.7% and 3.1% related to real estate services. Included in revenues related
to noncancer physician services are revenues of $0.1 million and $3.6 million
for the 1999 Quarter and the 1999 Period, respectively, related primarily to
physician employment and management agreements the Company had terminated as of
October 31, 1998.
Net revenues were $91.6 million and $250.3 million for the 1998 Quarter and
1998 Period, respectively. Such revenues consisted of $27.7 million and $80.0
million or 30.3% and 31.9% related to cancer services; $38.6 million and $106.5
million or 42.2% and 42.6% related to noncancer physician services; $20.1
million and $48.2 million or 21.9% and 19.3% related to other ancillary
services; and $5.2 million and $15.6 million or 5.6% and 6.2% related to real
estate services. Included in revenues related to noncancer physician services
are revenues of $2.1 million and $8.5 million for the 1998 Quarter and the 1998
Period, respectively, related primarily to physician employment and management
agreements the Company had terminated as of October 31, 1998.
Expenses
The Company's cost of affiliated physician management services was $15.2
million and $49.9 million or 38.8% and 39.4% of net revenue from management
services agreements during the 1999 Quarter and 1999 Period, respectively. The
cost of affiliated physician management services was $16.9 million and $50.4
million or 39.9% and 42.7% of net revenue from management services agreements
during the 1998 Quarter and 1998 Period, respectively. Net revenue for the
physician practices managed by the Company was $39.0 million and $126.5 million
during the 1999 Quarter and 1999 Period and $42.3 million and $118.0 million
during the 1998 Quarter and 1998 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 decreased by $1.5 million from
$24.5 million or 26.7% of net revenues during the 1998 Quarter to $23.0 million
or 27.7% of net revenues during the 1999 Quarter and increased by $6.3 million
from $63.6 million or 25.4% of net revenues during the 1998 Period to $69.9
million or 25.0% of net revenues during the 1999 Period. For the 1999 Period the
change as a percentage of net revenues is primarily attributable to the
additional salaries, wages and benefits from the expansion of the Company's
businesses during the year ended January 31, 1998. In general, salaries, wages,
and benefits vary depending on whether the physician practice or ancillary
service company is owned or managed.
- 21 -
<PAGE>
The Company's supplies expense increased by $3.0 million from $12.0 million
or 13.1% of net revenues during the 1998 Quarter to $15.0 million or 18.1% of
net revenues during the 1999 Quarter and $12.1 million from $31.9 million or
12.7% of net revenues during the 1998 Period to $44.0 million or 15.8% of net
revenues during the 1999 Period. The increase in supplies expense as a
percentage of revenue is due to acquisitions of various ancillary service
companies that are more supply intensive.
The Company's depreciation and amortization expense increased by $0.8
million from $3.0 million or 3.3% of net revenues during the 1998 Quarter to
$3.8 million or 4.6% of net revenues during the 1999 Quarter and $3.2 million
from $7.8 million or 3.1% of net revenues during the 1998 Period to $11.0
million or 3.9% of net revenues during the 1999 Period. The increase is
primarily a result of the acquisitions completed after the 1998 Quarter and the
allocation of the purchase prices as required by purchase accounting and also
the effect of the Company's change in policy regarding certain intangibles.
Effective February 1, 1998, management changed its policies regarding
amortization of its management services agreement intangible assets. The Company
adopted a maximum of 25 years (from the inception of the respective intangible
asset) as the useful life for amortization of its management services agreement
intangible assets. Using the unamortized portion of the intangible at January
31, 1998, the Company began amortizing the intangible over the remainder of the
25 year useful life. These costs had historically been charged to expense
through amortization using the straight line method over the periods during
which the agreements are effective, generally 30 to 40 years. This change
represented a change in accounting estimate and, accordingly, does not require
the Company to restate reported results for prior years. This change increased
amortization expense relating to existing intangible assets at January 31, 1998,
by approximately $740,000 annually.
The Company's rent expense increased by $0.8 million from $4.6 million or
5.0% of net revenues during the 1998 Quarter to $5.4 million or 6.5% of net
revenues during the 1999 Quarter and $3.3 million from $11.7 million or 4.7% of
net revenues during the 1998 Period to $15.0 million or 5.4% of net revenues
during the 1999 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 provision for bad debt increased by $1.5 million from $0.9
million or 1.0% of net revenues to $2.4 million or 2.9% of net revenues during
the 1999 Quarter and $1.1 million from $3.2 million or 1.3% of net revenues to
$4.3 million or 1.5% of net revenues during the 1999 Period. The increase as a
percentage of revenues is primarily attributable to the additional provision
required.
The Company's merger and other noncontinuing costs of $10.2 million and
$11.1 million during the 1998 Quarter and the 1998 Period, respectively,
represent the merger transaction costs related to the CSL merger as well as
certain noncontinuing salary, consulting and management fee expenses incurred by
CSL. The merger transaction costs were recorded during the 1998 Quarter which
represents the quarter in which the transaction closed.
The Company's nonrecurring charge of $5.3 million during the 1999 Period
represents the charge resulting from the termination of several physician
management and employment agreements during the second quarter.
The Company's gain on sale of assets of $5.4 million during the 1999 Period
represented gains from the sale of real estate of approximately $4.5 million
during July 1998 and from the sale of a radiation therapy center of
approximately $0.9 million during February 1998. The gain on sale of assets of
$1.2 million and $1.9 million during the 1998 Quarter and the 1998 Period,
respectively, resulted from the sale of real estate and a radiation therapy
center.
The Company's extraordinary item of $51.6 million (net of tax benefit of
$8.4 million) during the 1999 Quarter and the 1999 Period represents the charge
resulting from divestitures or disposals that had occurred during the 1999
Quarter as well as the writedown of the assets of the businesses identified to
be divested or disposed subsequent to
- 22 -
<PAGE>
October 31, 1998. The carrying value of the assets of these businesses were
written down to their estimated net realizable value (less costs to sell).
The Company's provision for the loss on notes receivable of $2.7 million
during the 1999 Quarter and the 1999 Period represents the writedown of several
notes receivable that were collateralized by shares of Common Stock of the
Company to their net realizable value.
Prior to the CSL merger, CSL was treated as an 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 Company's income tax expense decreased by $8.6 million from $7.1
million or 32.7% of pretax income (prior to merger costs of $10.2 million which
are not tax deductible) during the 1998 Period to a benefit of $(1.5) million or
36.4% of pretax loss before extraordinary item during the 1999 Period. 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. The
Company follows the provisions of Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes."
Assets Held for Sale
During August, 1998, the Company initiated its plan to divest and exit its
PPM business and certain of its ancillary services businesses, including
diagnostic imaging, lithotripsy, and radiation therapy. Based on fair market
value estimates, the Company wrote down the carrying amounts of these businesses
to estimated fair value less cost to sell. This charge is included in the
Company's results from operations for the quarter ended October 31, 1998, as an
extraordinary item and consists primarily of goodwill impairment. In accordance
with APB 16, the Company is required to record these charges as an extraordinary
item since impairment losses are being recognized for divestitures and disposals
expected to be completed within two years subsequent to a pooling of interests
(the pooling of interests with CSL was effective October 15, 1997). At October
31, 1998, the remaining carrying amount of these businesses was $123.2 million.
The revenue and pretax income of these businesses which have been identified to
be divested or disposed for the three and nine months ended October 31, 1998
were $47.0 million and $0.1 million and $147.2 million and $7.8 million,
respectively.
Real Estate Services
The Company provides real estate services to related and unrelated third
parties in connection with the establishment of various healthcare related
facilities, including health parks, medical malls and medical office buildings.
The Company derives its real estate 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 real estate services 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 various 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.
- 23 -
<PAGE>
During August 1998, Bruce A. Rendina resigned as CEO and President of DASCO
and Vice Chairman of the Company. During September 1998, Mr. Rendina entered
into a Business Agreement (the "Business Agreement") with the Company. The
Business Agreement was entered into in settlement of certain claims by both the
Company and Rendina relating to Mr. Rendina's future competition with the
Company. The Business Agreement provides that the Company has the exclusive
development rights to 27 separate projects located in 12 separate states. In
addition, the Company and Mr. Rendina have agreed to share fees with respect to
five asset conversion projects and six medical facility development projects
whereby Mr. Rendina is entitled to the first twenty-five percent of the
projected development fees received on any shared fee project and the Company
and Mr. Rendina evenly split the remaining portion of the fees for such
projects. The Business Agreement also permits Mr. Rendina and his affiliates to
pursue independently the development of six separate projects in five states.
Finally, the Company and Mr. Rendina have provided mutual releases of each other
with respect to any event related to the business and employment relationships
of the parties. The Company has not yet determined the impact of Mr. Rendina's
resignation on the business and future results of operations of this segment,
and there can be no assurance that his resignation will not have a material
adverse impact on the business and results of operations of the Company as a
whole. In addition, pursuant to the restructuring the Company is currently
evaluating its options as they relate to the future of the real estate services
segment which may include continuing to operate the division or the sale or the
discontinuance of the division.
During the 1999 Quarter and the 1999 Period, the Company's real estate
services generated revenues of $0.6 million and $8.6 million and operating
(loss) income of ($1.1) million and $2.6 million, respectively. In addition, the
real estate services segment recorded a gain on sale of real estate of $4.5
million during the 1999 Period.
Liquidity and Capital Resources
Cash used by operating activities was $0.8 million for the 1999 Period.
Cash used by operating activities was $4.2 million for the 1998 Period. At
October 31, 1998, the Company's principal sources of liquidity consisted of
working capital of $157.5 million which included $24.2 million in cash and
$123.2 million in assets held for sale. The Company also had $28.2 million of
current liabilities, including approximately $10.6 million of indebtedness
maturing before October 31, 1999.
Cash used by investing activities was $12.5 million for the 1999 Period.
This primarily represents the total funds required by the Company for
acquisitions and capital expenditures of $15.5 million and advances under notes
receivable of $2.0 million offset by proceeds from the sale of assets of $5.1
million during the 1999 Period. Cash used by investing activities was $33.4
million for the 1998 Period. This primarily represents funds required by the
Company for acquisitions and capital expenditures of $42.5 million and the
advances under notes receivable of $3.5 million, partially offset by repayments
of notes receivable of $10.0 million and proceeds of $3.0 million from the sale
of assets during the 1998 Period.
Cash used by financing activities was $11.9 million for the 1999 Period and
primarily represented the repayment of debt of $8.2 million, purchase of
treasury stock of $0.5 million and advances to shareholder of $3.1 million. Cash
provided by financing activities was $8.2 million for the 1998 Period, which was
primarily composed of the proceeds from issuance of debt of $12.0 million and
the release of cash collateral of $4.5 million offset by the repayment of debt
of $7.3 million and the payment of dividends of $1.8 million.
In conjunction with various acquisitions that were completed through
October 31, 1998, the Company may be required to make various contingent
payments in the event that the acquired companies attain predetermined financial
targets during established periods of time following the acquisitions. If all of
the applicable financial targets were satisfied, for the periods covered, the
Company would be required to pay an aggregate of approximately $29.2 million
over the next five years. The payments, if required, are payable in cash and/or
Common Stock of the Company and have not been reflected on the balance sheet at
October 31, 1998. In addition, in conjunction with the acquisition of a clinical
research center and in conjunction with a joint venture entered into by the
Company during the year ended January 31, 1998, the Company may be required to
make additional contingent payments based on revenue and profitability measures
over the next five years. The contingent payment will equal 10% of the excess
gross revenue, as defined, provided the gross operating margins exceed 30%.
- 24 -
<PAGE>
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 (of which
none has been expended as of October 31, 1998) 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 at a predetermined future
date. 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 October 31, 1998, the Company had committed to
issue $1.1 million of Common Stock of the Company using the methodology
discussed above. This amount is included in other long-term liabilities on the
balance sheet.
In conjunction with the restructuring (as described earlier in "Recent
Events"), the Board approved its plan to divest and exit its PPM business and
certain of its ancillary services businesses including diagnostic imaging,
lithotripsy, and radiation therapy. The revenue and pretax income of these
businesses which have been identified to be divested or disposed for the three
and nine months ended October 31, 1998 were $47.0 million and $0.1 million and
$147.2 million and $7.8 million, respectively. Net loss for the three and nine
months ended October 31, 1998 includes an extraordinary item of $51.6 million
which represents the charge resulting from divestitures or disposals that had
occurred during the three months ended October 31, 1998 as well as the writedown
of the assets of businesses identified to be divested or disposed subsequent to
October 31, 1998. In accordance with APB 16, the Company is required to record
these charges as an extraordinary item since impairment losses are being
recognized for divestitures and disposals expected to be completed within two
years subsequent to a pooling of interests (the pooling of interests with CSL
was effective October 15, 1997). The net realizable value of the assets
identified to be divested or disposed was $123.2 million at October 31, 1998.
The Board of Directors of the Company authorized a share repurchase plan
pursuant to which the Company may repurchase up to $15 million of its Common
Stock from time to time on the open market at prevailing market prices. Through
November 1998, the Company had repurchased 213,000 shares at a net purchase
price of $0.5 million. The Board of Directors of the Company has temporarily
discontinued the share repurchase plan until the completion of certain asset
sales at which time the Company will reinstate the share repurchase plan.
The development and implementation of the Company's management information
systems will require ongoing capital expenditures. The Company expects that its
working capital of $157.5 million at October 31, 1998, which includes cash of
$24.2 million and the expected cash to be generated from the sale of the
businesses identified to be divested or disposed, will be adequate to satisfy
the Company's cash requirements for the next 12 months. The Company's capital
needs over the next several years may exceed capital generated from operations.
To finance its capital needs, the Company may incur indebtedness and issue, from
time to time, additional debt or equity securities, including Common Stock or
convertible notes. 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.
In September 1997, the Company entered into a secured credit agreement with
a bank providing for a $100 million revolving line of credit ($16.0 million of
which was outstanding at October 31, 1998, $6.0 million of such $16.0 million
outstanding was for letters of credit) for working capital and acquisition
purposes. The existing 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 which include minimum net
cash flow requirements. The existing credit agreement currently provides that
loans made under the credit agreement may only be used for acquisitions approved
by the lenders. The Company has recently negotiated an amendment to its credit
agreement. The amended credit agreement provides a $25 million revolving line of
credit for working capital with availability based upon a borrowing base
comprised of fixed assets and accounts receivable. The line matures in March
1999. Twenty-five percent of the proceeds from asset sales will be required to
be used to repay the line.
Factors to be Considered
The part of this Quarterly Report on Form 10-Q captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contains certain forward-looking statements which involve risks and
uncertainties. Readers should refer to a discussion under "Factors to be
Considered" contained in Part I, Item 1
- 25 -
<PAGE>
of the Company's Annual Report on Form 10-K for the year ended January 31, 1998
concerning certain factors that could cause the Company's actual results to
differ materially from the results anticipated in such forward-looking
statements. This discussion is hereby incorporated by reference into this
Quarterly Report. In addition, as discussed above, the Company has announced
plans to divest and exit its PPM business and certain of its ancillary services
businesses, including diagnostic imaging, lithotripsy and radiation therapy.
There can be no assurance that the Company will be successful in divesting and
exiting any or all of these businesses, that any or all of these transactions
will occur before any date or time, or that the Company will receive cash
proceeds equal to the $123.2 million which it reflects as the carrying amount of
these assets as of October 31, 1998. Further, there can be no assurance that the
Company will be successful in establishing itself as a significant company in
pharmaceutical contract research or in linking its nationally focused hospital
affiliations and its physician networks with clinical trials site management and
healthcare outcomes research.
Risks Associated With Year 2000
The Year 2000 date change issue is believed to affect virtually all
companies and organizations. If not corrected, many computer applications could
fail or create erroneous results by or at the year 2000. The Company recognizes
the need to ensure its operations will not be adversely impacted by the
inability of the Company's information systems to process data having dates on
or after January 1, 2000 (the "Year 2000" issues). The Company expects to
complete its full assessment of the Year 2000 issue no later than January 31,
1999, which is prior to any anticipated impact on its operating systems.
The Company is currently engaged in a broad restructuring initiative aimed
at repositioning the Company along two primary business lines - clinical
research which includes clinical trials, outcomes research and pharmacy
management services; and provider network services which includes support of the
Company's IPA and affiliated hospital relationships. The Company is also moving
forward with its plans to divest its businesses that do not fit with this new
strategic direction. These businesses are the PPM business and certain of its
ancillary services businesses, including lithotripsy, diagnostic imaging and
radiation therapy.
The Company has recently established a committee, led by its current acting
Chief Information Officer and a cross-functional team, to build, develop and
implement the information systems required for its pharmaceutical and network
services business lines and to assess and remediate the effect of the Year 2000
Issue on the Company's operations. The Company will contact its clients,
principal suppliers, and other vendors to assess whether their Year 2000 Issues,
if any, will affect the Company. There is no guarantee that the systems of other
companies on which the Company relies will be corrected in a timely manner or
that the failure to correct will not have a material adverse effect on the
Company's systems. Many Year 2000 dependencies have already been identified and
addressed through planned systems and infrastructure evolution, replacement, or
elimination. The continuing program described below is designed to permit the
Company to identify and address all remaining Year 2000 systems and dependencies
well in advance of the millennium change.
The first phase of the program, conducting an inventory of all systems and
dependencies that may be affected by the Year 2000 Issue, is substantially
complete. The second phase of the program, the assessment and categorization of
all the inventoried systems and dependencies by level of priority, reflecting
their potential impact on business continuation, is underway. Based on this
prioritization, the third phase will be to develop detailed plans to address
each Year 2000 Issue and a general contingency plan in the event that any
critical systems cannot be made fully compliant by January 1, 2000.
The Company's information technology systems ("IT Systems") can be broadly
categorized into the following areas: (i) clinical studies information systems,
(ii) managed care information systems, and (iii) other administrative
information systems including financial accounting, payroll, human resource and
other desktop systems and applications.
The Company recognizes that investment in information systems is integral
to its operations. The majority of the Company's technology expenditures relate
to the development and implementation of both clinical information and managed
care
- 26 -
<PAGE>
systems that are Year 2000 compliant. The clinical information systems are
expected to be fully operational at all sites by April 30, 1999. The managed
care systems are expected to be fully operational by December 31, 1999. The
Company believes that the Year 2000-related remediation costs incurred through
1998 have not been material to its results of operations. The Company is not yet
able to reasonably estimate the total costs to be incurred for completion of its
Year 2000 strategy.
Risks involved in the managed care applications include the risk that
failures in the Company's managed care systems causing a backlog of claims or
failures at one or more of the Company's payors will cause a delay in the
payment of claims and capitation payments, either of which could negatively
affect cash flows of the Company. The Company intends to develop contingency
plans for failures at the Company's electronic trading partners. The Company
intends to have contingency plans in place by July 1999. The nature of the Year
2000 issue, and the lack of historical experience in addressing it, however,
could result in unforeseen risks.
The Company's financial accounting system vendor has committed that the
Company's system will be Year 2000 compliant. The Company expects to be fully
Year 2000 compliant with its financial accounting systems no later than January
31, 1999 at a cost of approximately $30,000.
The Company bills and collects for medical services from numerous third
party payors in operating its business. These third parties include fiscal
intermediaries that process claims and make payments on behalf of the Medicare
program as well as insurance companies, HMO's and other private payors. As part
of the Company's Year 2000 strategy, a comprehensive survey has been sent to all
significant payors to assess their timeline for Year 2000 compliance and the
impact to the Company of any potential interruptions in services or payments.
The Company is working to accumulate the results by January 31, 1999. The
Company is in the process of contacting its principal clients, suppliers, and
other vendors concerning the state of their Year 2000 compliance. Until that
effort is completed, the Company cannot be assured that such third party systems
are or will be Year 2000 compliant and the Company is unable to estimate at this
time the impact on the Company if one or more third party systems is not Year
2000 compliant.
The foregoing assessment is based on information currently available to the
Company. The Company can provide no assurance that applications and equipment
that the Company believes to be Year 2000 compliant will not experience
problems. Failure by the Company or third parties on which it relies to resolve
Year 2000 problems could have a material adverse effect on the Company's results
of operations.
- 27 -
<PAGE>
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 15th day of December, 1998.
PHYMATRIX CORP.
By: /s/ Frederick R. Leathers
-------------------------------------------
Financial Officer, Treasurer
and Principal Accounting Officer
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