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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 April 30, 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 June 5, 1998, the number of outstanding shares of the registrant's
Common Stock, par value $0.01 per share, was 33,339,788.
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<PAGE>
PHYMATRIX CORP.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - April 30, 1998 (unaudited) and 3
January 31, 1998
Consolidated Statements of Operations (unaudited) - Three Months 4
Ended April 30, 1998 and 1997
Consolidated Statements of Cash Flows (unaudited) - Three Months 5
Ended April 30, 1998 and 1997
Notes to Consolidated Financial Statements (unaudited) - 6-11
Three Months Ended April 30, 1998 and 1997
Item 2. Management's Discussion and Analysis of Financial Condition 12-20
and Results of Operations
PART II - OTHER INFORMATION
Item 2. Changes in Securities 21
Item 6. Exhibits and Reports on Form 8-K 21
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
PHYMATRIX CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
<TABLE>
<CAPTION>
April 30, January 31,
1998 1998
--------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 41,835 $ 49,536
Receivables:
Accounts receivable, net 63,200 57,252
Other receivables 16,281 14,240
Notes receivable 1,758 1,851
Prepaid expenses and other current assets 7,084 6,167
--------- ---------
Total current assets 130,158 129,046
Property, plant and equipment, net 45,489 44,295
Notes receivable 7,731 7,831
Goodwill, net 106,038 93,880
Management service agreements, net 98,691 89,470
Investment in affiliates 5,043 4,944
Other assets (including advances to shareholder) 12,981 8,694
---------- ---------
Total assets $ 406,131 $ 378,160
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of debt and capital leases $ 9,251 $ 13,742
Accounts payable 14,309 13,101
Accrued compensation 1,490 2,282
Accrued liabilities 14,714 13,531
--------- ---------
Total current liabilities 39,764 42,656
Long-term debt and capital leases, less current portion 20,332 20,617
Convertible subordinated debentures 100,000 100,000
Other long term liabilities 3,066 1,651
Minority interest 1,179 1,201
--------- ---------
Total liabilities 164,341 166,125
Commitments and contingencies
Shareholders' equity:
Common Stock, par value $.01; 40,000,000 shares
authorized; 33,107,234 and 31,248,474 shares issued
and outstanding at April 30, 1998 and
January 31, 1998, respectively 331 312
Treasury Stock (75) (75)
Additional paid in capital 222,237 198,893
Retained earnings 19,297 12,905
--------- ---------
Total shareholders' equity 241,790 212,035
--------- ---------
Total liabilities and shareholders' equity $ 406,131 $ 378,160
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-3-
<PAGE>
PHYMATRIX CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
-----------------------
1998 1997
----------- ----------
<S> <C> <C>
Net revenues from services $ 51,857 $34,671
Net revenue from real estate services 7,008 5,533
Net revenue from management service agreements 42,482 35,663
--------- -------
Total revenue 101,347 75,867
--------- -------
Operating costs and administrative expenses:
Cost of affiliated physician management services 17,154 16,977
Salaries, wages and benefits 23,876 18,597
Professional fees 3,560 2,118
Supplies 14,152 8,991
Utilities 1,284 1,033
Depreciation and amortization 3,574 2,319
Rent 4,794 3,366
Provision for bad debts 956 1,300
Merger and other noncontinuing expenses -- 307
Other - primarily capitation expense 20,764 13,810
--------- -------
Total operating costs and administrative expenses 90,114 68,818
--------- -------
Interest expense, net 1,839 784
Income from investment in affiliates (207) (218)
-------- -------
1,632 566
--------- -------
Income before provision for income taxes 9,601 6,483
Income tax expense 3,148 2,245
--------- -------
Net income (Note 4) $ 6,453 $ 4,238
======== =======
Net income per share - basic $ 0.20 0.15
Net income per share - diluted $ 0.20 $ 0.15
Pro forma information (Note 4):
Adjustment to income tax expense 126
Net income 4,112
Net income per weighted average share - basic $ 0.14
Net income per weighted average share - diluted $ 0.14
Weighted average shares outstanding - basic 32,647 28,831
======== =======
Weighted average shares outstanding - diluted 33,168 29,002
======== =======
</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>
Three Months Ended
April 30,
-----------------------
1998 1997
------------ ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,453 $ 4,238
Noncash items included in net income:
Depreciation and amortization 3,574 2,319
Other (including gain on sale of assets) (779) (731)
Changes in receivables (5,163) (6,011)
Changes in accounts payable and accrued liabilities (1,191) 3,603
Changes in other assets (2,753) (1,969)
--------- --------
Net cash provided by operating activities 141 1,449
--------- --------
Cash flows from investing activities:
Capital expenditures (1,791) (335)
Sale of assets 3,157 1,490
Notes receivable, net 193 (5,467)
Other assets 56 --
Acquisitions, net of cash acquired (3,866) (3,751)
--------- --------
Net cash used by investing activities (2,251) (8,063)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 118 38
Borrowings under line of credit -- 1,000
Advances to shareholder (4,311) --
Release of cash collateral -- 480
Offering costs and other (72) (152)
Payment of dividends -- (737)
Repayment of debt (1,326) (930)
--------- --------
Net cash used by financing activities (5,591) (301)
--------- --------
Decrease in cash and cash equivalents $ (7,701) $ (6,915)
========= ========
Cash and cash equivalents, beginning of period $ 49,536 $ 81,650
========= --------
Cash and cash equivalents, end of period $ 41,835 $ 74,735
========= ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-5-
<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended April 30, 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 months ended April 30, 1998
are not necessarily indicative of results that may be expected for the year.
2. 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 service 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 will provide management services for the
MSO which will provide 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.
-6-
<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended April 30, 1998 and 1997 (Unaudited)
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 is currently being amortized over 25 years.
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 service agreements of
$4,670,000. The resulting intangible is currently being amortized over 25 years.
During April 1998, the Company completed the formation of an MSO, which is
51% owned by the Company, with LIPH, LLC. The Company will manage for the MSO
the medical risk contracting for the more than 2,600 physicians in IPAs in New
York. The base purchase price of $2,500,000 was paid in cash and Common Stock.
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, $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 months ended
April 30, 1997, the noncontinuing costs represented 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.
-7-
<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended April 30, 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 APRIL 30, 1997
Net revenue $ 75,867 $ 75,867 $ 75,867
Merger and other noncontinuing costs 307 307 --
Net income 4,238 4,112 4,296
Net income per share - basic $ 0.15 $ 0.14 $ 0.15
Net income per share - diluted $ 0.15 $ 0.14 $ 0.15
Weighted average number of shares outstanding - basic 28,831 28,831 28,831
Weighted average number of shares outstanding - diluted 29,002 29,002 29,002
</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.
3. Supplemental Cash Flow Information
During the three months ended April 30, 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. During the three months ended
April 30, 1998, the Company also issued shares of stock which had been committed
to be issued in conjunction with acquisitions completed during the year ended
January 31, 1998. The transactions had the following non-cash impact on the
balance sheets of the Company as of the indicated dates:
<TABLE>
<CAPTION>
April 30
--------------------------
1998 1997
---- ----
<S> <C> <C>
Current assets $ 1,148 $ 1,375
Property, plant and equipment 1,977 252
Intangibles 23,394 4,510
Other noncurrent assets 597 354
Current liabilities (811) (974)
Noncurrent liabilities (2,640) --
Debt 3,451 --
Equity (23,250) (1,766)
</TABLE>
During the three months ended April 30, 1998 and 1997, the Company sold
radiation therapy centers for $3.1 million and $1.5 million, respectively. These
sales resulted in gains of $0.9 million and $0.7 million, respectively.
-8-
<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended April 30, 1998 and 1997 (Unaudited)
4. 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.
5. 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:
<TABLE>
<CAPTION>
Per Share
(In thousands, except per share data) Income Shares Amount
------ ------ ---------
Three Months Ended April 30, 1998
- ---------------------------------
<S> <C> <C> <C>
Basic earnings per share
Income available to common stockholders $ 6,453 $ 32,647 $ 0.20
Effect of dilutive securities
Stock options -- 46
Convertible debt 49 475
-------- --------- -------
Diluted earnings per share $ 6,502 $ 33,168 $ 0.20
======== ========= =======
Three Months Ended April 30, 1997
- ---------------------------------
Basic earnings per share
Income available to common stockholders $ 4,238 $ 28,831 $ 0.15
Effect of dilutive securities
Stock options -- 171
-------- --------- -------
Diluted earnings per share $ 4,238 $ 29,002 $ 0.15
======== ========= =======
</TABLE>
For the three months ended April 30, 1998 and 1997, no additional
securities or related adjustments to income were made for the common stock
equivalents related to the Debentures since the effect would be antidilutive.
-9-
<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended April 30, 1998 and 1997 (Unaudited)
6. Ratio of Earnings to Fixed Charges
For the three months ended April 30, 1998, the ratio of earnings to fixed
charges was 3.26. For purposes of computing the ratio of earnings to fixed
charges, earnings represent income from operations before minority interest and
income taxes, plus fixed charges. Earnings also includes the equity in
less-than-fifty-percent-owned 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.
7. Accounting Developments and Pronouncements
Effective February 1, 1998, management changed its policies regarding
amortization of its management service agreement intangible assets. The Company
adopted a maximum of 25 years as the useful life for amortization of its
management service agreement intangible assets. These costs have 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 represents a change in accounting estimate and, accordingly, does
not require the Company to restate reported results for prior years. The Company
expects this estimate change to increase amortization expense relating to
existing intangible assets at January 31, 1998, by approximately $185,000 per
quarter.
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. EITF 97-2 is
effective for the Company's financial statements for the year ended January 31,
1999 and for any transactions occurring after November 20, 1997. The Company
does not believe that the implementation of EITF 97-2 will have a material
impact on its financial condition or its earnings. However, adoption of this
statement could reduce reported revenues for the three months ended April 30,
1998, by a maximum of 17% from $101.3 million to $84.3 million. 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 assets. The Company has not yet completed its evaluation of the
impact of this Statement on the Company's financial statements.
8. 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
-10-
<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended April 30, 1998 and 1997 (Unaudited)
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.
9. Subsequent 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. The
Company has not determined a timetable to complete its evaluation. The Company
intends to hire an investment banker in the near future to assist in this
process. There can also be no assurance that the Board will conclude that any
alternative is acceptable, nor can there be any assurance that any transaction
will be completed.
During June 1998, the Company decided to terminate several physician
management and employment agreements and as a result expects to record a
nonrecurring pretax charge of approximately $6 million during the second quarter
ended July 31, 1998. The majority of this charge will be a noncash charge. The
Company also is currently evaluating its remaining employed and nonguaranteed
managed physician agreements which have not performed to its expectations. The
Company may elect to terminate or restructure some or all of these agreements,
although there can be no assurance that the Company will conclude that any
alternative is acceptable or that the Company will be successful in implementing
any alternative that it elects.
-11-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
The Company is a physician-driven, integrated medical management company
that provides management services to the medical community. The Company also
provides 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's primary strategy is to develop
management networks in specific geographic locations by affiliating with
physicians, medical providers and medical networks. The Company affiliates with
physicians by acquiring their practices and entering into long-term management
agreements with the acquired practices and by managing independent physician
associations ("IPAs") and specialty care physician networks through management
service organizations ("MSOs") in which the Company has ownership interests. The
Company also provides ancillary services including radiation therapy, diagnostic
imaging, infusion therapy, home healthcare, lithotripsy services, ambulatory
surgery and clinical research studies. Since its first acquisition in September
1994, the Company has acquired the practices of and entered into long-term
agreements to affiliate with over 374 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 33
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.
Acquisitions and CSL Merger
Three Months Ended April 30, 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 service 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 will provide management services for the
MSO which will provide 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.
-12-
<PAGE>
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 is currently being amortized over 25 years.
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 service agreements of
$4,670,000. The resulting intangible is currently being amortized over 25 years.
During April 1998, the Company completed the formation of an MSO, which is
51% owned by the Company, with LIPH, LLC. The Company will manage for the MSO
the medical risk contracting for the more than 2,600 physicians in IPAs in New
York. The base purchase price of $2,500,000 was paid in cash and Common Stock.
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, $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.
During February 1997, the Company purchased the assets of and entered into
a 40-year management agreement with five physicians in Utah. The purchase price
was $2,498,148. Of such purchase price, $1,378,148 was paid in cash and 75,293
shares of Common Stock of the Company were issued having a value of $1,120,000.
The purchase price was allocated to the assets at their fair market value,
including management service agreements of $1,364,482. The resulting intangible
is currently being amortized over 25 years.
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 service agreements and is currently being amortized over 25 years.
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
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<PAGE>
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 service 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 $1,570,078.
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 up to 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. The purchase price was allocated to the
assets at their fair market value, including goodwill of $10,280,273. The
resulting intangible is being amortized over 30 years.
During June 1997, the Company acquired the remaining 20% interest in a
lithotripsy company that it purchased during 1994. The interest was acquired in
exchange for cash and 54,500 shares of Common Stock of the Company having a
total value of $2,005,000. The purchase price was allocated to goodwill and is
being amortized over 20 years.
During 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 service
agreements of $23,023,256 and is currently being amortized over 25 years.
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 service agreements of $1,598,421, and is currently being
amortized over 25 years.
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
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<PAGE>
allocated to the assets at their fair market value, including management service
agreements of $8,133,680, and is currently being amortized over 25 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 incurred by CSL will be noncontinuing. During the three months ended April
30, 1997, the noncontinuing costs represented 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.
<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 APRIL 30, 1997
Net revenue $ 75,867 $ 75,867 $ 75,867
Merger and other noncontinuing costs 307 307 --
Net income 4,238 4,112 4,296
Net income per share - basic $ 0.15 $ 0.14 $ 0.15
Net income per share - diluted $ 0.15 $ 0.14 $ 0.15
Weighted average number of shares outstanding - basic 28,831 28,831 28,831
Weighted average number of shares outstanding - diluted 29,002 29,002 29,002
</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.
-15-
<PAGE>
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 service
agreements, and employment and consulting agreements. Through the asset and/or
stock purchase agreement, the Company acquires the equipment, furniture,
fixtures, supplies and, in certain instances, service agreements, of a physician
practice at the fair market value of the assets. The accounts receivable are
typically purchased at the net realizable value. The purchase price of the
practice generally consists of cash, notes and/or Common Stock of the Company
and the assumption of certain debt, leases and other contracts necessary for the
operation of the practice. The management services or employment agreements
delineate the responsibilities and obligations of each party.
Net revenue from 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 service 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
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<PAGE>
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. EITF 97-2 is
effective for the Company's financial statements for the year ended January 31,
1999 and for any transactions occurring after November 20, 1997. The Company
does not believe that the implementation of EITF 97-2 will have a material
impact on its financial condition or its earnings. However, adoption of this
statement could reduce reported revenues for the three months ended April 30,
1998, by a maximum of 17% from $101.3 million to $84.3 million. The Company has
implemented EITF 97-2 for all transactions occurring after November 20, 1997.
Net revenues under management services agreements for the three months ended
April 30, 1998, were $42.5 million.
Results of Operations
Three Months Ended April 30, 1998 Compared to Three Months Ended April 30, 1997
The following discussion reviews the results of operations for the three
months ended April 30, 1998 (the "1999 Quarter") compared to the three months
ended April 30, 1997 (the "1998 Quarter").
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,
diagnostic imaging 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 $101.3 million for the 1999 Quarter. Of this amount,
$29.2 million or 28.8% of such revenues was attributable to cancer services;
$42.2 million or 41.7% was related to noncancer physician services; $22.9
million or 22.6% of such revenues was attributable to other ancillary services;
and $7.0 million or 6.9% related to real estate services.
Net revenues were $75.9 million for the 1998 Quarter. Such revenues
consisted of $25.5 million or 33.6% related to cancer services; $32.0 million or
42.2% related to noncancer physician services; $12.9 million or 16.9% related to
other ancillary services; and $5.5 million or 7.3% related to real estate
services.
Expenses
The Company's cost of affiliated physician management services was $17.2
million or 40.4% of net revenue from management services agreements during the
1999 Quarter. The cost of affiliated physician management services was $17.0
million or 47.6% of net revenue from management services agreements during the
1998 Quarter. Net revenue for the physician practices managed by the Company was
$42.5 million during the 1999 Quarter and $35.7 million during the 1998 Quarter.
The cost of affiliated physician management services as a percentage of net
revenue from management services varies based upon the type of physician
practices.
The Company's salaries, wages, and benefits increased by $5.3 million from
$18.6 million or 24.5% of net revenues during the 1998 Quarter to $23.9 million
or 23.6% of net revenues during the 1999 Quarter. The change as a percentage of
net revenues is primarily attributable to the fact that (i) salaries, wages, and
benefits vary depending on whether the physician practice is owned or managed
and (ii) salaries, wages, and benefits vary as the Company expands its other
ancillary services.
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<PAGE>
The Company's supplies expense increased by $5.2 million from $9.0 million
or 11.9% of net revenues during the 1998 Quarter to $14.2 million or 14.0% of
net revenues during the 1999 Quarter. 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 $1.3
million from $2.3 million or 3.1% of net revenues during the 1998 Quarter to
$3.6 million or 3.5% of net revenues during the 1999 Quarter. 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. Effective
February 1, 1998, management changed its policies regarding amortization of its
management service agreement intangible assets. The Company adopted a maximum of
25 years as the useful life for amortization of its management service agreement
intangible assets. These costs have 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 represents a
change in accounting estimate and, accordingly, does not require the Company to
restate reported results for prior years. The Company expects this estimate
change to increase amortization expense relating to existing intangible assets
at January 31, 1998, by approximately $185,000 per quarter.
The Company's rent expense increased by $1.4 million from $3.4 million or
4.4% of net revenues during the 1998 Quarter to $4.8 million or 4.7% of net
revenues during the 1999 Quarter. 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 merger and other noncontinuing costs of $0.3 million during
the 1998 Quarter represent certain noncontinuing management fee expenses
incurred by CSL. During the 1999 Quarter, the Company sold a radiation therapy
center resulting in a gain of $0.9 million. During the 1998 Quarter, the Company
sold a radiation therapy center resulting in a gain of $0.7 million.
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 increased by $0.9 million from $2.2
million or 34.6% of pre-tax income during the 1998 Quarter to $3.1 million or
32.8% of pretax income during the 1999 Quarter. 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."
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 believes that the development of such facilities, in certain
markets, will aid in the integration of its affiliated physicians and ancillary
services and will provide future opportunities to affiliate with physicians and
acquire future physician practices or ancillary services.
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.
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<PAGE>
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. During the 1999 Quarter, the Company's real estate services
generated revenues of $7.0 million and operating income of $4.8 million,
respectively.
Liquidity and Capital Resources
Cash provided by operating activities was $0.1 million for the 1999
Quarter. Cash provided by operating activities was $1.4 million for the 1998
Quarter. At April 30, 1998, the Company's principal sources of liquidity
consisted of working capital of $90.4 million which included $41.8 million in
cash. The Company also had $39.8 million of current liabilities, including
approximately $9.3 million of indebtedness, which includes $5.0 million of
convertible debt, maturing before April 30, 1999.
Cash used by investing activities was $2.3 million for the 1999 Quarter.
This primarily represents the total funds required by the Company for
acquisitions and capital expenditures of $5.7 million offset by the repayments
of notes receivable of $0.2 million and proceeds from the sale of assets of $3.2
million during the 1999 Quarter. Cash used by investing activities was $8.1
million for the 1998 Quarter. This primarily represents funds required by the
Company for acquisitions and capital expenditures of $4.1 million and advances
under notes receivable of $5.5 million, offset by proceeds of $1.5 million from
the sale of assets during the 1998 Quarter.
Cash used by financing activities was $5.6 million for the 1999 Quarter and
primarily represented the repayment of debt of $1.3 million and advances to
shareholder of $4.3 million. Cash used by financing activities was $0.3 million
for the 1998 Quarter, which was primarily comprised of the release of cash
collateral of $0.5 million and borrowings under a line of credit of $1.0
million, offset by the payment of dividends and the repayment of other debt of
$0.7 million and $0.9 million, respectively.
In conjunction with various acquisitions that were completed through April
30, 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 $31.9 million over the next five
years. The payments, if required, are payable in cash and/or Common Stock of the
Company. 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.
During July 1997, the Company entered into a management services agreement
to manage a network of over 100 physicians in New York. In connection with this
transaction, the Company has committed to expend up to $40 million to be
utilized for the expansion of the network.
During August 1997, the Company purchased certain assets and assumed
certain liabilities of, and entered into an administrative services agreement
with BAB Nuclear Radiology, P.C., to operate five diagnostic imaging centers on
Long Island, New York. The purchase price was approximately $10.5 million in
cash, $15.0 million in
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<PAGE>
convertible notes and the assumption of $1.6 million in debt. At April 30, 1998,
$5.0 million of the convertible notes was outstanding and such amount was paid
in cash during May 1998.
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 April 30, 1998, the Company had committed to
issue $2.6 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 May 1998, the Company's Board of Directors 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. The Company has not
determined a timetable to complete its evaluation. The Company intends to hire
an investment banker in the near future to assist in this process. There can be
no assurance that the Board will conclude that any alternative is acceptable,
nor can there be any assurance that any strategic transaction can be completed.
The development and implementation of the Company's management information
systems will require ongoing capital expenditures. The Company expects that the
existing working capital of $90.4 million, which includes cash of $41.8 million,
and the $84 million which is available under the revolving line of credit will
be adequate to satisfy the Company's cash requirements for the next 12 months.
Depending on the strategic alternatives, if any, selected and implemented by the
Company, 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 for working capital
and acquisition purposes. The credit agreement (i) prohibits the payment of
dividends by the Company, (ii) limits the Company's ability to incur
indebtedness and make acquisitions except as permitted under the credit
agreement and (iii) requires the Company to comply with certain financial
covenants which include minimum net worth and interest coverage requirements and
a maximum funded debt to cash flow limitation.
Factors to be Considered
The part of this Quarterly Report on Form 10-Q captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contains certain forward-looking statements which involve risks and
uncertainties. Readers should refer to a discussion under "Factors to be
Considered" contained in Part I, Item 1 of the Company's Annual Report on Form
10-K for the year ended January 31, 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.
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<PAGE>
PART II--OTHER INFORMATION
Item 2. Changes in Securities -- Recent Sales of Unregistered Securities
During February 1998, the Company issued 3,827 shares of Common Stock
(valued at $50,000) to a consultant for services rendered.
During April 1998, the Company agreed to issue shares of Common Stock to a
clinical research company in connection with the acquisition of its assets by
the Company. In connection with the acquisition, (i) the Company issued 144,405
shares of Common Stock in May 1998 (valued at $1,500,000) and agreed to issue
$70,000 of Common Stock in April 1999 and $1,070,000 of Common Stock in April
2000 based upon the market price of the Common Stock at the time of issuance in
those years and (ii) up to an additional $2,350,000 of Common Stock based upon
certain contingencies over the next four years and the market price of the
Common Stock at the time of issuance.
The foregoing sales of the shares in connection with the transactions were
not registered under the Securities Act of 1933, as amended, in reliance upon
Section 4(2) thereof.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on May 26, 1998 with the
Securities and Exchange Commission reporting under Item 5 the Company's
exploration of strategic alternatives to maximize shareholder value.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 12th day of June, 1998.
PHYMATRIX CORP.
By: /s/ Frederick R. Leathers
----------------------------
Financial Officer, Treasurer
and Principal Accounting Officer
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<FISCAL-YEAR-END> JAN-31-1999 JAN-31-1998
<PERIOD-START> FEB-1-1998 FEB-1-1997
<PERIOD-END> APR-30-1998 APR-30-1997
<EXCHANGE-RATE> 1 1
<CASH> 41,835 74,735
<SECURITIES> 0 0
<RECEIVABLES> 117,391 78,631
<ALLOWANCES> (54,191) (29,993)
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<CURRENT-ASSETS> 130,158 144,424
<PP&E> 59,123 47,352
<DEPRECIATION> (13,634) (9,484)
<TOTAL-ASSETS> 406,131 324,047
<CURRENT-LIABILITIES> 39,764 32,523
<BONDS> 100,000 100,000
0 0
0 0
<COMMON> 331 279
<OTHER-SE> 241,459 155,035
<TOTAL-LIABILITY-AND-EQUITY> 406,131 324,047
<SALES> 101,347 75,867
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<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 89,907 68,600
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<INTEREST-EXPENSE> 1,839 784
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<CHANGES> 0 0
<NET-INCOME> 6,453 4,238
<EPS-PRIMARY> 0.20 0.15
<EPS-DILUTED> 0.20 0.15
</TABLE>
