<PAGE>
DRAFT 6/9/99 4:24 PM
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
April 30, 1999
[ ] 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.)
10 Dorrance Street, Suite 400, Providence Rhode Island 02903
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (401) 831-6755
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 1, 1999, the number of outstanding shares of the registrant's
Common Stock, par value $0.01 per share, was 32,529,429.
<PAGE>
PHYMATRIX CORP.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets -- April 30, 1999 (unaudited) and January 31, 3
1999
Consolidated Statements of Operations (unaudited) -Three Months Ended 4
April 30, 1999 and 1998
Consolidated Statements of Cash Flows (unaudited) - Three Months Ended 5
April 30, 1999 and 1998
Notes to Consolidated Financial Statements (unaudited) - Three Months 6-10
Ended April 30, 1999 and 1998
Item 2. Management's Discussion and Analysis of Financial Condition and Results 11-18
of Operations
PART II - OTHER INFORMATION
Item 2. Changes in Securities - Recent Sales of Unregistered Securities 19
Item 6. Exhibits and Reports on Form 8-K 19
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PHYMATRIX CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
April 30, January 31,
1999 1999
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 9,470 $ 10,137
Receivables:
Accounts receivable, net 17,578 15,276
Income tax refund receivable 10,789 10,789
Other receivables 8,692 6,760
Notes receivable 4,893 5,060
Prepaid expenses and other current assets 2,722 1,260
Assets held for sale 96,812 100,795
--------- ---------
Total current assets 150,956 150,077
Property, plant and equipment, net 11,290 11,024
Notes receivable 7,314 7,274
Goodwill, net 40,498 41,007
Management service agreements, net 27,891 28,167
Other assets (including advances to shareholder) 15,402 15,302
--------- ---------
Total assets $ 253,351 $ 252,851
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of debt and capital leases $ 24,015 $ 12,192
Accounts payable 14,365 13,602
Accrued compensation 1,465 1,475
Accrued and other current liabilities 11,946 11,623
--------- ---------
Total current liabilities 51,791 38,892
Long-term debt less current maturities 4,800 5,465
Convertible subordinated debentures 100,000 100,000
Other long-term liabilities 1,121 1,191
Minority interest 1,403 1,403
--------- ---------
Total liabilities 159,115 146,951
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.01, 40,000 shares authorized, 33,387 and 33,344
shares issued at April 30, 1999 and January 31, 1999, respectively, 32,665
and 32,916 shares outstanding at April 30, 1999 and January 31, 1999,
respectively 327 329
Treasury stock (1,751) (1,202)
Additional paid in capital 224,787 224,715
Retained earnings (accumulated deficit) (129,127) (117,942)
--------- ---------
Total shareholders' equity 94,236 105,900
--------- ---------
Total liabilities and shareholders' equity $ 253,351 $ 252,851
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
<PAGE>
PHYMATRIX CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
-----------------------
1999 1998
-----------------------
(unaudited)
<S> <C> <C>
Net revenues from services $ 43,855 $ 50,518
Net revenues from management service agreements 16,749 26,667
Net revenues from real estate services 60 7,008
-------- --------
Total revenue 60,664 84,193
-------- --------
Operating costs and administrative expenses:
Salaries, wages and benefits 19,202 23,876
Professional fees 4,276 3,560
Supplies 14,164 14,152
Utilities 1,142 1,284
Depreciation and amortization 3,628 3,574
Rent 4,476 4,794
Provision for bad debts 634 956
Gain on sale of assets -- (916)
Other (primarily capitation expense) 21,658 21,680
-------- --------
Total operating costs and administrative expenses 69,180 72,960
-------- --------
Interest expense, net 2,619 1,839
Income from investment in affiliates -- (207)
-------- --------
2,619 1,632
-------- --------
(Loss) income before provision for income taxes (11,135) 9,601
Income tax expense 50 3,148
-------- --------
Net (loss) income $(11,185) $ 6,453
-------- --------
-------- --------
Net (loss) income per share - basic (Note 7) $ (0.33) $ 0.20
-------- --------
Net (loss) income per share - diluted (Note 7) $ (0.33) $ 0.20
-------- --------
Weighted average shares outstanding - basic 33,529 32,647
-------- --------
-------- --------
Weighted average shares outstanding - diluted 33,529 33,168
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
<PAGE>
PHYMATRIX CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
-----------------------
1999 1998
------------------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(11,185) $ 6,453
Noncash items included in net income (loss):
Depreciation and amortization 3,628 3,574
Amortization of debt issuance costs 744 241
Other (including gain on sale of assets) 7 (1,020)
Changes in receivables (1,445) (5,163)
Changes in accounts payable and accrued liabilities (2,851) (1,191)
Changes in other assets (2,522) (2,753)
-------- --------
Net cash (used) provided by operating activities (13,624) 141
-------- --------
Cash flows from investing activities:
Capital expenditures (914) (1,791)
Sale of assets 4,694 3,157
Notes receivable, net (148) 193
Other 38 56
Acquisitions, net of cash acquired -- (3,866)
-------- --------
Net cash provided (used) by investing activities 3,670 (2,251)
-------- --------
Cash flows from financing activities:
Advances from (to) shareholder 270 (4,311)
Proceeds from issuance of common stock -- 118
Repurchase of treasury stock (552) --
Proceeds from issuance of debt 21,672 --
Offering costs and other (2) (72)
Repayment of debt (12,101) (1,326)
-------- --------
Net cash provided (used) by financing activities 9,287 (5,591)
-------- --------
Decrease in cash and cash equivalents $ (667) $ (7,701)
-------- --------
-------- --------
Cash and cash equivalents, beginning of period $ 10,137 $ 49,536
-------- --------
-------- --------
Cash and cash equivalents, end of period $ 9,470 $ 41,835
-------- --------
-------- --------
</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, 1999 AND 1998 (UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
include the accounts of PhyMatrix Corp. ("the Company"). These interim
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and the requirements of the Securities
and Exchange Commission. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. It
is management's opinion that the accompanying interim financial statements
reflect all adjustments (which are normal and recurring) necessary for a fair
presentation of the results for the interim periods. These interim financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
year ended January 31, 1999. Operating results for the three months ended April
30, 1999 are not necessarily indicative of results that may be expected for the
year.
2. SIGNIFICANT 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 stockholder value. During August 1998, the Company announced
that the Board of Directors approved several strategic alternatives to enhance
stockholder value. The Board authorized a series of initiatives designed to
restructure the Company as a significant company in pharmaceutical contract
research, specifically clinical trials site management and outcomes research.
The Company intends to link its nationally focused hospital affiliations and its
physician networks with its clinical trials site management and healthcare
outcomes research operations.
During August 1998, the Board approved, consistent with achieving its
stated restructuring goal, its plan to divest and exit the Company's physician
practice management ("PPM") business and certain of its ancillary services
businesses, including diagnostic imaging, lithotripsy and radiation therapy.
Subsequent to August 1998, the Company has also decided to divest its home
health business and exit its infusion therapy business. Net loss for the year
ended January 31, 1999 included an extraordinary item of $96.8 million which is
primarily a non-cash charge related to these divestitures. 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). Based on
fair market value estimates, which have primarily been derived from letters of
intent, letters of interest and discussions with prospective buyers, the Company
currently expects to realize net proceeds of approximately $96.8 million from
the sale of the remaining businesses identified to be divested or disposed and
has recorded this amount as an asset held for sale on the balance sheet at April
30, 1999.
3. SUPPLEMENTAL CASH FLOW INFORMATION
During the three months ended April 30, 1998, 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 and sold certain assets. During
the three months ended April 30, 1999 and 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. During the three months ended
April 30, 1999, the Company also terminated several physician management and
employment agreements. The transactions had the following non-cash impact on the
balance sheets of the Company as of the indicated dates:
- 6 -
<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED APRIL 30, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
APRIL 30,
------------------------
1999 1998
---- ----
<S> <C> <C>
Current assets $ (1,580) $ 785
Property, plant and equipment 923 908
Intangibles 1,424 23,394
Other noncurrent assets (587) 524
Current liabilities (3,961) (1,544)
Noncurrent liabilities 102 (2,640)
Debt (984) 3,451
Equity (70) (24,170)
</TABLE>
During the three months ended April 30, 1998, the Company sold a radiation
therapy center for $3.1 million. This sale resulted in a gain of $0.9 million.
4. ASSETS HELD FOR SALE
During the year ended January 31, 1999, the Board approved, consistent
with achieving its stated restructuring goal, its plan to divest and exit the
Company's PPM business and certain of its ancillary services businesses,
including diagnostic imaging, lithotripsy, radiation therapy, home health and
infusion therapy. During the three months ended April 30, 1999, the Company
divested eight physician practices, terminated its relationship with several
employed physicians and sold one radiation therapy center and an equity
investment in a diagnostic imaging center. Based on fair market value
estimates, which estimates were primarily derived from letters of intent,
letters of interest or discussions with prospective buyers, the Company
currently expects to realize net proceeds of approximately $96.8 million from
the sale of the remaining businesses identified to be divested or disposed
and has recorded this amount as an asset held for sale on the balance sheet
at April 30, 1999.
5. REVOLVING LINE OF CREDIT
During March 1999, the Company entered into a $30.0 million revolving
line of credit which has a three-year term and availability based upon
eligible accounts receivable. The line of credit bears interest at prime plus
1.0% and fees are 0.0875%. Approximately $9.2 million of proceeds from the
new line of credit were used to repay the previous line of credit, and
approximately $2.0 million were used as cash collateral for a $2.0 million
letter of credit. The line of credit is secured by the assets of the Company,
limits the ability of the Company to incur certain indebtedness and make
certain dividend payments, and requires the Company to comply with other
customary covenants. As of April 30, 1999, there was $22.2 million
outstanding under the line of credit which is included in the current portion
of debt and capital leases.
6. TREASURY STOCK
The Board of Directors of the Company authorized a share repurchase plan
pursuant to which the Company may repurchase up to $15.0 million of its Common
Stock from time to time on the open market at prevailing market prices. Through
January 31, 1999, the Company had repurchased 304,000 shares at a net purchase
price of $0.8 million. Through April 30, 1999, the Company has repurchased an
additional 294,000 shares at a net purchase price of approximately $0.6 million.
- 7 -
<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED APRIL 30, 1999 AND 1998 (UNAUDITED)
7. 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>
(IN THOUSANDS, EXCEPT PER SHARE DATA) (LOSS) PER SHARE
INCOME SHARES AMOUNT
-----------------------------------------
THREE MONTHS ENDED APRIL 30, 1999
---------------------------------
<S> <C> <C> <C>
Basic earnings per share
Loss available to common stockholders $ (11,185) 33,529 $ (0.33)
Effect of dilutive securities:
Stock options - - -
Convertible debt - - -
---------- ------- --------
Diluted earnings (loss) per share $ (11,185) 33,529 $ (0.33)
---------- ------- --------
---------- ------- --------
THREE MONTHS ENDED APRIL 30, 1998
---------------------------------
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
---------- ------- --------
---------- ------- --------
</TABLE>
For the three months ended April 30, 1999 and 1998, 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.
8. RATIO OF EARNINGS TO FIXED CHARGES
For the three months ended April 30, 1999, 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
months ended April 30, 1999, for purposes of computing the ratio of earnings to
fixed charges, the Company's earnings were inadequate to cover fixed charges by
$11.1 million.
- 8 -
<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED APRIL 30, 1999 AND 1998 (UNAUDITED)
9. ACCOUNTING CHANGES AND PRONOUNCEMENTS
In 1997, the Emerging Issues Task Force of the Financial Accounting
Standards Board issued EITF 97-2 concerning the consolidation of physician
practice revenues. PPMs are 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-92 was effective for the Company's financial statements for the
year ended January 31, 1999. Adoption of this statement reduced previously
reported revenues for the three months ended April 30, 1998 by $17.2 million.
During August 1998, the Company announced its plan to divest and exit the PPM
business. The majority of these assets which have not yet been divested are
recorded as assets held for sale at April 30, 1999.
During the year ended January 31, 1999, the company adopted SFAS
131, "Disclosures About Segments of an Enterprise and Related Information."
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.
FASB Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued in June 1998. It establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. As issued, Statement 133 is
effective for all fiscal quarters of all fiscal years beginning after June
15, 1999. Recently the FASB has proposed a Statement that would amend FASB
Statement No. 133, and to defer its effective date to all fiscal quarters of
all fiscal years beginning after June 15, 2000. The adoption of this
statement is not expected to have a material impact on the Company's results
of operations, financial position or cash flows or to produce any major
changes in current disclosures.
10. 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. Oral arguments were held on May 26, 1999, and the
Company is waiting for the judges' ruling. 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 April 30, 1999.
In conjunction with a physician practice management agreement with a
physician practice in Florida, the Company has filed suit against the practice
to enforce the guarantees executed in connection with the management agreement.
The practice has filed a counterclaim. The Company intends to vigorously
prosecute and defend the case. However, if the Company is not successful it may
be required to record an impairment charge up to a maximum of $3.7 million.
- 9 -
<PAGE>
PHYMATRIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED APRIL 30, 1999 AND 1998 (UNAUDITED)
11. SEGMENT INFORMATION
For the fiscal year ending January 31, 1999, the Company adopted SFAS 131.
The prior year's segment information has been restated to present the Company's
reportable segments. The Company has determined that its reportable segments are
those that are based on its current method of internal reporting. The reportable
segments are: provider network management, site management organization, real
estate services and assets held for sale. The accounting policies of the
segments are the same as those described in the "Summary of Significant
Accounting Policies." There are no intersegment revenues and the Company does
not allocate corporate overhead to its segments. The tables below present
revenue, pretax income (loss) and net assets of each reportable segment for the
indicated periods:
<TABLE>
<CAPTION>
PROVIDER SITE REAL ASSETS RECONCILING CONSOLIDATED
NETWORK MANAGEMENT ESTATE HELD FOR ITEMS (1) TOTALS
MANAGEMENT ORGANIZATIONS SALE
<S> <C> <C> <C> <C> <C> <C>
QUARTER ENDED APRIL 30, 1999
----------------------------
Net revenues $ 18,191 $ 8,796 $ 60 $ 33,617 $ - $ 60,664
Income (loss) before income taxes (1,598) (2,536) (644) (744) (5,613) (11,135)
Net assets 43,490 22,226 11,843 96,812 (80,135) 94,236
QUARTER ENDED APRIL 30, 1998
----------------------------
Net revenues $ 24,491 $ 10,050 $ 7,008 $ 42,644 $ - $ 84,193
Income (loss) before income taxes 2,456 1,096 4,573 5,792 (4,316) 9,601
Net assets 48,574 21,700 19,103 226,711 (74,298) 241,790
</TABLE>
(1) Reconciling items consist of corporate expenses and corporate net assets
(primarily the convertible subordinated debentures, net of cash) which are
not allocated.
- 10 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
PhyMatrix is repositioning itself as a company that provides diverse
services supporting the needs of the pharmaceutical and managed care industries.
The Company is focusing its operations on two integrated business lines:
pharmaceutical services, including investigative site management, clinical and
outcomes research and disease management, as well as multi and single-specialty
provider network management. Historically, the Company has been an integrated
medical management company that provides medical management services to the
medical community, certain ancillary medical services to patients and medical
real estate development and consulting services to related and unrelated third
parties. In August 1998, the Company announced that it planned to change this
business model. The Company is in the process of terminating its management of
individual and group physician practices and divesting itself of related assets,
and selling and divesting itself of its ancillary medical service businesses,
such as diagnostic imaging, radiation therapy, lithotripsy services, home
healthcare and infusion therapy. The Company also has significantly downsized
its medical facility development and consulting services. The Company currently
estimates that by the end of its current fiscal year it will have exited its
physician practice management ("PPM") and ancillary medical service businesses.
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 stockholder value. During August 1998, the Company announced
that the Board of Directors approved several strategic alternatives to enhance
stockholder value. The Board authorized a series of initiatives designed to
restructure the Company as a significant company in pharmaceutical contract
research, specifically clinical trials site management and outcomes research.
The Company intends to link its nationally focused hospital affiliations and its
physician networks with its clinical trials site management and outcomes
research operations.
During the year ended January 31, 1999, the Board approved, consistent with
achieving its stated restructuring goal, its plan to divest and exit the
Company's PPM business and certain of its ancillary services businesses,
including diagnostic imaging, lithotripsy, radiation therapy, home health and
infusion therapy. The revenue and pretax loss of these businesses which have
been identified to be divested or disposed for the three months ended April 30,
1999 were $33.6 million and $0.7 million, respectively. Based on fair market
value estimates, which have primarily been derived from letters of intent,
letters of interest and discussions with prospective buyers, the Company
currently expects to realize net proceeds of approximately $96.8 million from
the sale of the remaining businesses identified to be divested or disposed and
has recorded this amount as an asset held for sale on the balance sheet at April
30, 1999.
During the fourth quarter ended January 31, 1999, the Company made the
decision to significantly downsize its real estate services segment and recorded
a goodwill impairment write-down of approximately $9.1 million which eliminates
the remaining goodwill of the real estate services segment.
ACCOUNTING TREATMENT
The terms of the Company's relationships with its remaining 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.
- 11 -
<PAGE>
Net revenues 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. These revenues are reported net of payments to physicians.
Net revenues from management services agreements include the revenues
generated by the physician practices net of payments to physicians. 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 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. PPMs are
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
adopted EITF 97-2 in the fourth quarter of its fiscal year ended January 31,
1999. Adoption of this statement reduced previously reported revenues and
expenses for the three months ended April 30, 1998 by $17.2 million. 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 April 30, 1999.
- 12 -
<PAGE>
RESULTS OF OPERATIONS
The following table shows the percentage of net revenue represented by
various expense categories reflected in the Consolidated Statements of
Operations. The information that follows should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto included elsewhere
herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30,
------------------------
1999 1998
------------------------
<S> <C> <C>
Net revenue 100.0% 100.0%
Salaries, wages and benefits 31.7% 28.4%
Supplies 23.3% 16.8%
Depreciation and amortization 6.0% 4.2%
Rent expense 7.4% 5.7%
Provision for bad debts 1.0% 1.1%
Gain on sale of assets 0.0% (1.1%)
Other 44.6% 31.5%
------ -------
Total operating costs and administrative expenses 114.0% 86.6%
Interest expense, net 4.3% 2.2%
(Income) from investment in affiliate 0.0% (0.2%)
------ -------
Income (loss) before provision for income taxes (18.3%) 11.4%
Income tax expense 0.1% 3.7%
------ -------
Net income (loss) (18.4%) 7.7%
------ -------
------ -------
</TABLE>
THE THREE MONTHS ENDED APRIL 30, 1999 COMPARED TO THE THREE MONTHS ENDED APRIL
30, 1998
The following discussion reviews the results of operations for the three
months ended April 30, 1999 (the "2000 Quarter") compared to the three months
ended April 30, 1998 (the "1999 Quarter").
REVENUES
The Company currently derives revenues primarily from the following
segments: provider network management, site management organizations, real
estate services and assets held for sale. Revenues from provider network
management are derived from management services provided to hospitals,
management services to management service organizations and administrative
services to health plans which include reviewing, processing and paying claims
and subcontracting with specialty care physicians to provide covered services.
Revenues from site management organizations are derived primarily from services
provided to pharmaceutical companies for clinical trials. Revenues from real
estate services are derived from the provision of a variety of services which
include development fees, general contracting management fees, leasing and
marketing fees, project cost savings income and consulting fees. Revenues from
assets held for sale are derived primarily from providing the following
services: physician practice management, diagnostic imaging, radiation therapy,
home healthcare, infusion therapy and lithotripsy.
- 13 -
<PAGE>
Net revenues were $60.7 million during the 2000 Quarter. Of this amount,
$18.2 million or 30.0% of such revenues was attributable to provider network
management; $8.8 million or 14.5% was related to site management
organizations; $0.1 million or 0.1% was attributable to real estate services;
and $33.6 million or 55.4% was attributable to assets held for sale.
Net revenues were $84.2 million during the 1999 Quarter. Of this amount,
$24.5 million or 29.1% of such revenues was attributable to provider network
management; $10.1 million or 11.9% was related to site management organizations;
$7.0 million or 8.3% was attributable to real estate services; and $42.6 million
or 50.7% was attributable to assets held for sale.
The Company's net revenues from provider network management services
decreased by $6.3 million from $24.5 million for the 1999 Quarter to $18.2
million for the 2000 Quarter. At the beginning of the year, the Company began
negotiations to restructure a management services agreement to manage a
network of over 100 physicians. The ultimate resolution of the restructuring
and collection of any receivables due from the beginning of the year is
uncertain; therefore, the Company has not recorded revenue from the
agreement. For the 1999 Quarter, the Company recorded $5.0 million of net
revenues from this agreement for the 2000 Quarter. The Company's net revenues
from site management organizations decreased by $1.3 million from $10.1
million for the 1999 Quarter to $8.8 million for the 2000 Quarter. The
Company's net revenues from real estate services decreased by $6.9 million
from $7.0 million for the 1999 Quarter to $0.1 million for the 2000 Quarter,
primarily due to the Company's decision in the fourth quarter ended January
31, 1999 to significantly downsize its real estate services segment in
connection with the repositioning of the Company and in part due to the
resignation of Bruce A. Rendina as Chief Executive Officer of this segment.
The Company's net revenues from assets held for sale decreased by $9.0
million from $42.6 million for the 1999 Quarter to $33.6 million for the 2000
Quarter primarily attributable to the asset divestitures.
EXPENSES
The Company's salaries, wages and benefits decreased by $4.7 million from
$23.9 million or 28.4% of net revenues during the 1999 Quarter to $19.2 million
or 31.7% of net revenues during the 2000 Quarter. The decrease in dollars is
primarily attributable to the reductions in personnel in conjunction with the
asset divestitures.
The Company's supplies expense was $14.2 million or 16.8% of net revenues
during the 1999 Quarter and $14.2 million or 23.3% of net revenues during the
2000 Quarter. The increase in supplies expense as a percentage of net revenues
was primarily due to the growth of infusion and cancer service revenues that are
more supply intensive and for which the cost of pharmaceutical supplies is
higher.
The Company's rent expense decreased by $0.3 million from $4.8 million or
5.7% of net revenues during the 1999 Quarter to $4.5 million or 7.4% of net
revenues during the 2000 Quarter. The decrease is primarily a result of the
asset divestitures.
The Company's gain on sale of assets during the 1999 Quarter represents a
gain from the sale of a radiation therapy center of approximately $0.9 million
during February 1998.
The Company's other expenses increased by $0.6 million from $26.5
million or 31.5% of net revenues during the 1999 Quarter to $27.1 million or
44.6% of net revenues during the 2000 quarter. The increase in other expenses
as a percentage of net revenues is primarily due to an increase in capitation
revenues related to the Company's provider network management services as a
percentage of total revenues.
The Company's interest expense increased by $0.8 million from $1.8 million
or 2.2% of net revenues during the 1999 Quarter to $2.6 million or 4.3% of net
revenues during the 2000 quarter, primarily due to the acceleration of the
amortization of debt issuance costs related to the line of credit which was
repaid during the 2000 quarter.
The Company's loss prior to income taxes during the 2000 Quarter was $11.1
million compared to income prior to income taxes during the 1999 Quarter of $9.6
million. The deterioration of income during the 2000 Quarter is primarily due to
several factors including: (i) The downsizing of the real estate services
segment which was done in connection with the repositioning of the Company, and
in part due to the resignation of Bruce A. Rendina as Chief Executive Officer of
the Company's real estate services segment. The real estate services segment
generated a pretax loss of $0.6 million during the 2000 Quarter compared to
pretax income of $4.6 million during the 1999 Quarter, (ii) The deterioration of
the operating results of certain of the businesses divested or to be divested.
The assets held for sale segment generated a pretax loss of $0.7 million during
the 2000 Quarter compared to pretax income of $5.8 million during the 1999
Quarter, and (iii) The Company is in the process of repositioning and building
infrastructure to expand and integrate its two primary business lines:
provider network services and pharmaceutical services (site management
organizations). Combined these businesses generated a pretax
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<PAGE>
loss of $4.1 million during the 2000 Quarter compared to pretax income of $3.6
million during the 1999 Quarter.
The Company's income tax expense decreased by $3.1 million from $3.2 million
or 3.7% of pretax income during the 1999 Quarter to $0.1 million or 0.1% of
pretax loss during the 2000 Quarter, which is primarily due to the Company
having a net loss for the 2000 Quarter.
REAL ESTATE SERVICES
While the Company has historically derived significant revenues from
real estate services, in the future the Company anticipates that it will
generate significantly fewer revenues from such services. As a result, the
Company decided to significantly downsize its real estate services.
During August 1998, Bruce A. Rendina resigned as CEO and President
of DASCO (the Company's real estate services subsidiary) 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 Mr.
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 25% 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.
During the year ended January 31, 1999, the Company recorded a goodwill
impairment write-down of $9.1 million which eliminates the remaining goodwill of
the real estate services segment. The asset of goodwill was determined to have
been impaired because of the Company's decision to significantly downsize the
real estate segment and the inability to generate future operating income
without substantial revenue growth, which is uncertain. Moreover, anticipated
future cash flows of the real estate segment indicate that the recoverability of
the asset is not likely.
During the 2000 Quarter, the Company's real estate services generated
revenues of $0.1 million and a pretax loss of $0.6 million. During the 1999
Quarter, the Company's real estate services generated revenues of $7.0 million
and pretax income of $4.6 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash used by operating activities was $13.6 million during the 2000
Quarter. Cash provided by operating activities was $0.1 million during the
1999 Quarter. At April 30, 1999, the Company's principal sources of liquidity
consisted of working capital of $99.2 million which included $9.5 million in
cash, $10.8 million in a tax refund receivable and $96.8 million in assets
held for sale (see below for further discussion of assets held for sale)
offset by the current portion of debt and capital leases. The Company also
had $51.8 million of current liabilities, including approximately $24.0
million of indebtedness maturing before April 30, 2000.
Cash provided by investing activities was $3.7 million during the 2000
Quarter and primarily represented the net cash received from the sale of assets
of $4.7 million, offset by the funds required by the Company for capital
expenditures of $0.9 million and advances under notes receivable of $0.1
million. Cash used by investing activities was $2.3 million during the 1999
Quarter. This primarily represented the funds required by the Company for
acquisitions and capital expenditures of $5.7 million offset by the cash
received from the sale of assets of $3.2 million.
Cash provided by financing activities was $9.3 million during the 2000
Quarter and primarily represented proceeds from the issuance of debt of $21.7
million, offset by the repayment of debt of $12.1 million and the purchase of
treasury stock of $0.6 million. Cash used by financing activities was $5.6
million during the 1999 Quarter, which was primarily composed of the repayment
of debt of $1.3 million and advances to shareholder of $4.3 million.
- 15 -
<PAGE>
In conjunction with various acquisitions that were completed through
January 31, 1999, 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 $22.9 million
over the next four years, of which $2.3 million is accrued at April 30, 1999.
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. The contingent payment will equal 10% of the excess gross
revenue, as defined, provided the gross operating margins exceed 30%.
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 may expend, in certain circumstances, up to $40.0
million (of which none has been expended as of April 30, 1999) to be utilized
for the expansion of the network.
During February 1998, the Company completed the formation of an MSO in New
York, one-third of which it owns. The owners of the remaining 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.
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, 1999, 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. The Company also guarantees a loan in the amount of $3.5 million
which matures in March 2000.
In conjunction with the repositioning (as described earlier in
"Significant Events"), the Board of Directors approved its plan to divest and
exit the Company's PPM business and certain of its ancillary services
businesses including diagnostic imaging, lithotripsy, radiation therapy, home
health and infusion therapy. The revenue and pretax loss of these businesses
which have been identified to be divested or disposed for the three months
ended April 30, 1999 were $33.6 million and $0.7 million. Based on fair
market value estimates, which have primarily been derived from letters of
intent, letters of interest and discussions with prospective buyers, the net
realizable value of the remaining assets identified to be divested or
disposed was $96.8 million at April 30, 1999.
In conjunction with a physician practice management agreement with a
physician practice in Florida, the Company has filed suit against the practice
to enforce the guarantees executed in connection with the management agreement.
The practice has filed a counterclaim. The Company intends to vigorously
prosecute and defend the case. However, if the Company is not successful it may
be required to record an impairment charge up to a maximum of $3.7 million.
The Board of Directors of the Company authorized a share repurchase plan
pursuant to which the Company may repurchase up to $15.0 million of its Common
Stock from time to time on the open market at prevailing market prices. As of
April 30, 1999 the Company has repurchased 598,000 shares at a net purchase
price of approximately $1.4 million.
The development and implementation of the Company's management information
systems will require ongoing capital expenditures. The Company has estimated the
total costs to be incurred for completion of its Year 2000 strategy is
approximately $3.0 million, which includes costs for new systems and system
upgrades which would have been incurred regardless of the need to remedy the
Year 2000 issue. The Company expects that its working capital of $99.2 million
at April 30, 1999, which includes cash of $9.5 million and the expected cash to
be generated from the assets held for sale, 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.
During March 1999, the Company obtained a new $30.0 million revolving line
of credit which has a three-year term and availability based upon eligible
accounts receivable. Approximately $9.2 million of proceeds from the new line of
credit were used to repay the previous line of credit. The new line of credit is
secured by the assets of
- 16 -
<PAGE>
the Company, limits the ability of the Company to incur certain indebtedness and
make certain dividend payments, and requires the Company to comply with other
customary covenants. At April 30, 1999, approximately $22.2 million was
outstanding under the line.
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" issue). The Company expects to
complete its full assessment of the Year 2000 issue no later than July 31, 1999,
which is prior to any anticipated impact on its operating systems.
The Company has a committee, led by its Chief Information Officer, to
build, develop and implement the information systems required for its
pharmaceutical and provider network management services business lines and to
assess and remediate the effect of the Year 2000 issue on the Company's
operations. The Company is contacting 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 such systems will not have a material adverse effect on the Company's
systems. Many Year 2000 deficiencies 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 deficiencies
well in advance of the millennium change.
The first phase of the program, conducting an inventory of all systems and
deficiencies 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 deficiencies 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, (iii) other administrative information
systems including financial accounting, payroll, human resource and other
desktop systems and applications and (iv) information systems of businesses held
for sale.
The Company recognizes that investment in information systems is
integral to its operations. The majority of the Company's technology
expenditures are related to the development and implementation of both
clinical information and managed care information systems that are Year 2000
compliant. The clinical information systems are expected to be fully
operational at all sites by July 31, 1999. The managed care information
systems are expected to be fully operational by December 31, 1999. The
Company believes that the Year 2000 issue-related remediation costs incurred
through the 2000 quarter have not been material to its results of operations.
The Company has estimated the total costs to be incurred for completion of
its Year 2000 strategy is approximately $3.0 million, which includes costs
for new systems and system upgrades which would have been incurred regardless
of the need to remedy the Year 2000 issue.
The Company's financial accounting system is fully Year 2000 compliant at a
total cost of approximately $30,000. Currently the Company is not assessing Year
2000 compliance for the information systems of the businesses held for sale
since the Company expects these businesses to be divested by December 31, 1999.
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 September 1999. The nature of the
Year 2000 issue, and the lack of historical experience in addressing it,
however, could result in unforeseen risks.
- 17 -
<PAGE>
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
July 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.
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, 1999 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 April 1999, the Company issued 42,585 shares of Common Stock
pursuant to an acquisition agreement entered into during the fiscal year ended
January 31, 1998. The sale of these shares and the acquisition in connection
with which they were sold were reported and described in the Company's Annual
Report on Form 10-K for the year ended January 31, 1999. The sale of the
aforementioned shares of Common Stock 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
None.
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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 11th day of June, 1999.
PHYMATRIX CORP.
By: /s/ Frederick R. Leathers
------------------------------------
Financial Officer, Treasurer
and Principal Accounting Officer
- 20 -
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