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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-13009
MEDICAL RESOURCES MANAGEMENT, INC.
(Name of small business issuer as specified in its charter)
NEVADA 95-4607643
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
932 GRAND CENTRAL AVENUE GLENDALE, CALIFORNIA 91201
(Address of principal executive offices) (Zip Code)
(818) 240-8250
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Common Stock,
Section 12(g) of the Exchange Act: par value $.001 per share
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
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Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
The Registrant's revenues for the fiscal year ended October 31, 1997 were
$8,105,140.
As of January 30, 1998, the aggregate market value of the voting stock held
by non-affiliates of the Registrant (based upon the average of the closing
bid and asked prices on such date) was approximately $2,096,000.
Documents incorporated by reference: Certain responses to Part III are
incorporated herein by reference to information contained in the Registrant's
definitive proxy statement for its 1998 Annual Meeting of Stockholders as filed
with the Securities and Exchange Commission on March 2, 1998.
Exhibits index page number: 19
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PART I
FORWARD-LOOKING STATEMENTS
This Report on Form 10-KSB/A includes certain statements that may be deemed
to be "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The sections of this Report on
Form 10-KSB/A containing such forward-looking statements include "Description
of Business," "Historical Background," "Growth," "Acquisitions," "Products
and Services," "Marketing and Sales," "Markets" and "Competition" under Item
1 below, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" under Item 2 below. Statements in this Form 10-KSB/A
which address activities, events or developments that the registrant expects
or anticipates will or may occur in the future, including such topics as
future issuances of shares, future capital expenditures (including the amount
and nature thereof), expansion and other development and technological trends
of industry segments in which the registrant is active, business strategy,
expansion and growth of the registrant's and its competitors' business and
operations and other such matters are forward-looking statements. Although
the registrant believes the expectations expressed in such forward-looking
statements are based on reasonable assumptions within the bounds of its
knowledge of its business, a number of factors could cause actual results to
differ materially from those expressed in any forward-looking statements,
whether oral or written, made by or on behalf of the registrant.
The registrant's operations are subject to factors outside its control.
Any one, or a combination, of these factors could materially affect the
results of the registrant's operations. These factors include: (a) changes
in levels of competition from current competitors and potential new
competition; (b) loss of a significant customer; and (c) changes in
availability or terms of working capital financing from vendors and lending
institutions. The foregoing should not be construed as an exhaustive list of
all factors that could cause actual results to differ materially from those
expressed in forward-looking statements made by the registrant.
Forward-looking statements made by or on behalf of the registrant are based
on a knowledge of its business and the environment in which it operates, but
because of the factors listed above, actual results may differ from those
anticipated results described in these forward-looking statements.
Consequently, all of the forward-looking statements made are qualified by
these cautionary statements and there can be no assurance that the actual
results or developments anticipated by the registrant will be realized or,
even if substantially realized, that they will have the expected consequences
to or effects on the registrant or its business or operations.
ITEM 1. DESCRIPTION OF BUSINESS
Medical Resources Management, Inc. ("MRM" or the "Company") makes mobile
laser/surgical services available to its customers by providing this
equipment on a per procedure basis to hospitals, out patient surgery centers,
and physicians' offices. MRM provides these mobile lasers with technical
support to ensure the lasers are working correctly for the physicians. The
Company also provides other medical equipment on a rental basis to hospitals
and surgery centers. This equipment is used throughout such facilities to
supplement their requirement for certain medical equipment. The combination
of mobile laser/surgical services and medical equipment rental illustrates
the overall strategy and focus on diversification of the Company.
2
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MRM's laser/surgical services have appeal for two of the most rapidly
growing areas of the health care industry: managed care and cosmetic surgery.
For managed care, minimally invasive procedures can be performed by
physicians at hospitals that find the investment in the latest laser surgery
equipment and trained technicians to be uneconomical. For cosmetic surgery,
the physicians benefit from having a multitude of different laser
technologies available to offer to their patients without the burden of
investing a significant amount of money. In both instances, physicians and
hospitals receive technical support and expertise which is provided with the
equipment, which allows the staff to focus on their duties without the
additional tasks of running a laser.
The Company believes it enjoys an advantage that the small competitor
cannot match due to the quantity and variety of its laser equipment, its
highly trained technicians, and the training courses it provides for
technicians and health care professionals. The Company has approximately 600
active accounts in California, Arizona, Utah, Colorado and Nevada and
experiences a higher than 90% rate of repeat business from the hospitals,
surgery centers and doctors that it serves. The market encompasses many
disciplines including plastic/cosmetic surgery, dermatology, orthopedic
surgery, otolaryngology, urology, obstetrics, gynecology, ophthalmology,
general surgery, podiatry and dentistry. Equipment is becoming more
specialized to the medical procedures involved, and technical training of the
physician, regarding the use of equipment, is a significant part of MRM's
business.
MRM is the successor entity pursuant to a reorganization which occurred on
July 31, 1996 between Physiologic Reps, Inc. ("PRI"), which has been active
in this business since 1973, and Kendall Management Corporation, a public
company which previously was inactive. PRI continues as a wholly owned
subsidiary of MRM. THROUGHOUT THIS DOCUMENT "MRM" IS USED TO REFER TO MRM
AND ITS WHOLLY OWNED SUBSIDIARIES, INCLUDING PRI, EVEN IN HISTORICAL CONTEXT.
The Company is headquartered at 932 Grand Central Ave., Glendale,
California. See "Reorganization" and "Acquisitions."
HISTORICAL BACKGROUND
MRM's largest wholly owned operating subsidiary, PRI, was incorporated in
California in 1973 and moved to its present headquarters building in 1994,
located in Glendale, California. The Company also has sales and service
offices in Stockton, CA, Dublin, CA and Phoenix, AZ. PRI produced
approximately 83% of the consolidated revenues of MRM during the year ended
October 31, 1997.
MRM entered the hospital equipment rental market in 1974, the mobile
laser/surgical services market in 1987, cosmetic skin resurfacing in 1994 and
leg vein treatment and tattoo removal in 1997. The Company began to expand
its mobile laser/surgical services to the doctors' offices and their clinics
in 1995. This business is complementary to the existing laser/surgical
services MRM has provided to hospitals. In 1997, the Company made the
decision to expand its cosmetic services to include specialized lasers for
treatment of vascular lesions, pigmented lesions and tattoo removal.
Additionally, the Company has acquired new laser technology to assist in the
removal of leg veins and continues to evaluate lasers for the removal of
unwanted hair.
3
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During the past few years, revenue from the Company's mobile
laser/surgical services business has greatly exceeded the medical equipment
rental business. However, MRM has a large array of general medical equipment
which it rents, primarily to hospitals, and has acquired substantial
additional general medical equipment during fiscal 1997. The Company's
inventory of medical equipment includes an extensive variety of medical
devices, serving a broad range of hospital departments or needs. This wide
array of medical rental equipment, delivered to customers on very short
notice, was the Company's primary business until about 1987, when the Company
developed the mobile surgical laser business. During fiscal 1997, the
Company began to renew its emphasis on the rental of general medical
equipment.
GROWTH
Since its inception, MRM has focused on providing rental and other
services to its clients on an as needed basis. As a result, the Company has
established long-term relationships with a number of physicians, hospitals
and other medical care providers. The Company's management believes that
such relationships provide an opportunity to introduce additional products to
these customers by expanding MRM's product lines beyond laser/surgical
services and medical equipment rentals. This strategy could also have a
beneficial effect when coupled with the growth strategy of MRM through
acquisition of similar companies. See "Acquisitions."
MRM's strategic plan is to acquire other companies in the medical services
and equipment rental business to take advantage of current opportunities in
the market place. Opportunities for growth are created because a wider range
of new surgical laser equipment is coming to market with features oriented
toward a wider variety of medical specialties. Surgical laser procedures are
also becoming more popular with the public. This increased popularity is
increasing the number of surgical laser procedures performed. Another factor
favoring growth of surgical laser rentals by hospitals is the effort by
managed care to reduce costs through less invasive procedures. The managed
care effort has also reduced funds available for investment in new equipment
and training. Part of MRM's business strategy is to take advantage of
hospitals' decreased ability to invest in capital equipment, as well as the
synergy between mobile laser/surgical services and medical equipment rental,
to increase revenue and reduce costs.
ACQUISITIONS
On March 31 1997, the Company acquired 100% of the issued and outstanding
capital stock of Pulse Medical Products, Inc. ("Pulse"), headquartered in
Boise, ID, in exchange for 325,000 shares of its own common stock. As a
result, Pulse became a wholly owned subsidiary of MRM.
Pulse rents medical equipment and sells related equipment and supplies.
Pulse conducts its business in Idaho, Montana, Utah, Colorado, Minnesota and
Wyoming. Pulse will continue to operate as a wholly owned subsidiary of MRM,
and its headquarters will remain in Boise, ID.
On June 30 1997, MRM acquired 100% of the issued and outstanding capital
stock of Laser Medical, Inc. ("Laser Medical"), headquartered in Murray, UT,
in exchange for 190,000 shares of its own common stock. As a result, Laser
Medical became a wholly owned subsidiary of MRM. In addition, the Company
obtained a non-compete agreement from the principal former shareholder of
Laser Medical in consideration of the payment of $80,000 in cash.
Laser Medical provides mobile laser/surgical services to hospitals, out
patient surgery centers, and physicians' offices. Laser Medical operates its
business in Utah and Colorado. Since the date of its acquisition by MRM,
Laser Medical has operated as a wholly owned subsidiary of MRM, and will
continue to do so.
4
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Also on June 30, 1997, the Company acquired 100% of the issued and
outstanding capital stock of Med Surg Specialties, Inc. ("Med Surg"), located
in Brea, CA, in exchange for 214,667 shares of its common stock. As a
result, Med Surg became a wholly owned subsidiary of MRM. In addition, the
Company obtained a non-compete agreement from the principal former
shareholder of Med Surg in consideration of the payment of $138,000 in cash
($50,000 in July, 1997 with the balance payable $50,000 in 1998 and $38,000
in 1999).
Med Surg makes mobile laser/surgical services available to hospitals, out
patient surgery centers, and physician's offices. Med Surg's operations,
which were conducted primarily in the Southern California area, were absorbed
into PRI at the time of the acquisition.
MRM intends to continue the pursuit of its strategic plan of acquiring
other companies in the medical services and equipment rental business to take
advantage of current opportunities in the market place. The Company intends
to establish a nationwide presence through acquisitions and thus position
itself to service chains of hospitals and clinics which are currently only
served inefficiently on a fractionated basis.
PRODUCTS AND SERVICES
MRM's technicians deliver equipment and provide technical support to
physicians and operating room ("O.R.") personnel as needed. Once the
technician is at the customer site, he posts required warning notices outside
the O.R., issues safety equipment to the O.R. staff, provides any disposable
materials needed, and supplies equipment certifications or documentation
required for hospital record-keeping. The MRM technician sets the
physician's requested power settings and maintains a laser safe environment
during the surgical procedure. Hospitals and surgery facilities, especially
those with fluctuating occupancy levels, find this outsourcing of trained
technicians, on an as-needed basis, a cost effective alternative to training
and staffing their own personnel. More than 60% of the Company's revenue was
generated from the rental of technician supported equipment during each of
the last two fiscal years.
The Company's lasers encompass the latest technology in CO2, Nd:YAG, Pulse
Dye, KTP/YAG, and Holmium YAG models. MRM has established an excellent
working relationship with the leading laser manufacturers and is often the
first service company to receive new laser technology in its markets. The
Company is constantly reviewing developments in the medical laser field to
stay abreast of the latest technology available.
MRM also provides its customers with disposable products and/or
attachments that are needed for a given procedure. This applies primarily to
laser related rentals requiring laser drapes, masks, fibers, tubing, etc.
The customers benefit from this added service since they save the added costs
that would be incurred if they had to purchase a large inventory of these
disposable products.
Additionally, MRM offers a broad spectrum of general medical equipment to
the medical market that it serves. The Company's inventory of equipment
includes an extensive variety of devices, serving a broad range of hospital
departments and needs, such as CO2 monitors, defibrillators, feeding pumps,
PCA pumps, ECG monitors, infusion pumps, neo-natal monitors, and pulse
oximeters.
Due in part to its varied inventory of equipment, MRM is usually capable
of offering delivery and support of rental items with only a few hours'
notice. Mobile laser/surgical services are ordered in advance and
re-confirmed with the customer the day before the procedure by the scheduling
department.
5
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MARKETING AND SALES
The principal focus of the business is providing mobile laser/surgical
services. Commencing in the latter part of the fiscal year ended October
31, 1997, the Company began to offer new lasers designed for a variety of
medical procedures including cosmetic and dermatological treatments, such as
(i) treatment of leg veins, (ii) removal of unwanted hair, and (iii) skin
rejuvenation.
Additionally, the Company is expanding its business of renting medical
equipment to hospitals, surgery centers and physicians in their offices. The
Company also plans on selectively adding to its disposable products. MRM
believes that it will be able to take advantage of the excellent working
relationship it enjoys with its customers as an avenue for new product sales.
Management believes that this approach will add to the revenue of the Company
and will complement the services currently being provided to customers.
The Company's sales efforts are supported by a direct sales force which
focuses on providing timely service and products to MRM's customers. In
addition, the Company sponsors educational seminars on new laser technology,
which are attended by physicians. This allows the direct sales force to
introduce new laser technology and procedures to the Company's customer base
as soon as new lasers are offered by manufacturers. This method has proven
to be successful in developing new business from physicians. The Company
benefits from the physician training which occurs at these educational
seminars because the physicians can immediately implement the new laser
technology offered by MRM.
MRM's sales representatives attend national and regional physician medical
seminars and trade shows to present the Company's services and products.
MRM also creates markets for its products and services through direct mailing
of marketing literature and promotional materials regarding its complete
range of laser/surgical services to hospitals, surgery centers and physicians.
MARKETS
The Company's principal markets, and percent of revenue from each, during
fiscal years ended October 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
<S> <C> <C>
Mobile Laser/Surgical Services 45% 61%
Cosmetic Mobile Laser/Surgical Services
(Primarily Physician Office Based) 17% 12%
Medical Equipment Rentals 23% 13%
Equipment and Disposable Sales 15% 14%
</TABLE>
Medical Data International, Inc. defined the total market for surgical
procedures (in and out of hospital), market growth and segmentation in a
report issued in 1996. This report indicates that there were 29 million
total surgical procedures performed in the U.S. in 1994, which was an
increase of 12.4% over the 25.8 million procedures in 1990. Outpatient
procedures increased 70.8% from 11 million to 18.9 million, while the
percentage of total procedures performed on an outpatient basis grew to 65%
from 43%. The percentage of surgical procedures performed in physicians'
offices grew to 12% from 6% during the same time.
6
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HOSPITAL MOBILE LASER/SURGICAL SERVICES
MRM was one of the first companies to provide mobile laser/surgical
services to hospitals and surgery centers. Because of MRM's long tenure of
providing laser surgical services in the Southern California market and the
emergence of fragmented competition, this has become a mature market place
with growth dependent on new procedures and products. This situation does
not exist in most other parts of the country, providing the Company with a
growth opportunity in other geographic markets.
The mobile laser/surgical services, both hospital/surgery center based and
physician office based, provide a quick entry into new geographic markets
with multiple strategies. Once a facility is established in a new geographic
market, the opportunity exists to use that facility as a dispatch point for
equipment rentals and new products.
COSMETIC MOBILE LASER/SURGICAL SERVICES
The cosmetic laser business is primarily physician office based. This
market did not emerge for the Company until early 1995, and has been
characterized by rapid changes in specific techniques as new technology
emerges.
In recent years, skin resurfacing cosmetic laser surgery has shown
significant growth. However, price competition is emerging in this market
from smaller start up companies. Recent legislation in California and some
other states restricting anesthesia in doctors' offices may redirect much of
this cosmetic surgery to hospitals and surgery centers where MRM has a strong
base. As the skin rejuvenation market matures, new markets will be emerging
for the treatment of leg veins and the removal of unwanted hair. Because of
customer inquiries, the Company believes that recently developed laser
technology for collapsing veins so that they are no longer visible will
produce a significant increase in the number of doctors using mobile lasers.
In addition, the anticipated introduction to the market of new lasers for
unwanted hair removal will add a companion procedure to the vein procedure.
An American Academy of Cosmetic Surgery survey reported that approximately
2.7 million cosmetic surgery procedures were performed in the U.S. in 1994.
A survey by the American Society of Plastic and Reconstructive Surgeons
reported that patients between the ages of 35 and 50 represented 41% of the
cosmetic surgery procedures performed in the U.S. in 1994. The survey also
reported that approximately 36% of the cosmetic procedures performed in the
U.S. in 1994 were performed in physicians' offices. The market for specific
cosmetic laser surgery procedures, as documented in various medical journals,
has been estimated as follows:
<TABLE>
<CAPTION>
PROCEDURE PERCENT OF PROCEDURE PERCENT OF
POPULATION POPULATION
<S> <C> <C> <C>
Red Lesions 8% Brown Lesions 10%
Tattoo Removal 8% Stretch Marks 25%
Balding 30% Wrinkles 38%
Varicose Veins 25% Warts 20%
Hair Removal 30%
</TABLE>
7
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HOSPITAL MEDICAL EQUIPMENT RENTALS
MRM entered the hospital equipment rental market in 1974, and maintained
that business as its primary source of revenue until the mobile
laser/surgical services became predominate in 1987. That transition took
place because of competition from national medical rental companies and high
demand for the newly developed mobile laser/surgical services.
The hospital equipment rental market has been reduced to two dominant
national companies. The older and smaller of these companies is Universal
Hospital Services ("UHS"), which provides medical equipment within the
hospital on a fee for use basis. Management believes that UHS does not focus
on the larger portion of that market which is supplemental equipment rentals.
The larger company is Mediq PRN ("Mediq"), which is dominant in the
supplemental rental business through contracts with large hospital management
companies. MRM has identified an excellent opportunity to service Mediq's
customers on a second call basis (as an alternative supplier to these
customers) at reasonable prices.
MRM believes that it has a competitive advantage in the market, since it
is one of the few companies that provide both mobile laser/surgical services
and medical equipment rental. There are a number of synergies among the
mobile laser/surgical services and the medical equipment rental business,
including:
- Shared facilities
- Shared warehouse and delivery employees
- Shared delivery vehicles
- Complimentary scheduling and booking staff
- Common management
- Shared sales staff at start up
EQUIPMENT AND DISPOSABLE SALES
MRM continues to evaluate several lines of disposable medical products to
introduce to its customers. As the medical rental market continues to be
challenged by smaller competitors, the Company intends to respond by offering
new products, as well as remaining competitive on current market pricing.
This is a natural progression for MRM, since it has a large customer base
typified by repeat business and ongoing personal contact between the
Company's sales representatives and the customers.
Another source of revenue is the re-marketing of used equipment. As a
result of its practice of updating laser and medical rental equipment, the
Company on occasion does sell used equipment. This used equipment is an
excellent choice for surgery centers or physicians that are looking for low
cost equipment that still meets the expectations of physicians and the
standards of regulatory agencies, while avoiding the high cost of new
equipment.
8
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GOVERNMENT REGULATIONS
The healthcare industry is subject to extensive federal and state regulation.
Promulgation of new laws and regulations, or changes in or re-interpretations
of existing laws or regulations, may significantly affect the Company's
business, operating results or financial condition. There can be no
assurance that a review of the Company's operations by courts or regulatory
authorities will not result in a determination that could adversely affect
the operations of the Company. In addition, there can be no assurance that
the regulatory environment in which the Company operates will not change
significantly in the future, which change could adversely affect the
Company's operations, financial condition, business opportunities or future
expansion. Furthermore, the manufacturers of medical equipment utilized by
the Company are subject to extensive regulation by the Food and Drug
Administration ("FDA"). Failure of such manufacturers to comply with FDA
regulations could result in the loss of approval by the FDA of such medical
equipment, which could adversely affect the Company's operating results or
financial condition. As consolidation among physician groups continues and
provider networks continue to be created, purchasing decisions may shift to
persons with whom the Company has not had prior contact. There can be no
assurance that the Company will be able to maintain its physician, payor or
manufacturer relationships under such circumstances.
POTENTIAL EXPOSURE TO LIABILITY
Physicians, hospitals and other providers in the healthcare industry are
subject to lawsuits which may allege medical malpractice or other claims.
Many of these lawsuits result in substantial defense costs and judgments or
settlements. The Company does not engage in the practice of medicine, nor
does it control the practice of medicine by physicians utilizing its services
or their compliance with regulatory requirements directly applicable to such
physicians or physician groups. However, the services provided by the
Company to physicians, including actions by the Company's technicians, its
establishment of protocols and its training programs, could give rise to
liability claims. Although the Company has not recently been a party to any
material litigation, including litigation relating to the practice of
medicine, there can be no assurance that the Company will not become involved
in such litigation in the future, or that any claim or claims arising from
such litigation will not exceed the Company's insurance coverage or that such
coverage will continue to be available.
COMPETITION
The market for MRM's services is highly competitive. Companies,
particularly in the laser surgery industry, are competing by cutting prices,
and therefore profit margins. In spite of such competition, the management
of MRM believes that it can compete successfully. MRM is one of the few
companies that provide surgical laser equipment to hospitals, ambulatory
surgery centers and doctors' offices. MRM is able to build its business on
the interrelation of these market segments.
MRM's competition for mobile laser surgery equipment rental is primarily
from a number of small companies with only a few surgical lasers each. In
most cases, these competing companies are founded by technicians who have
left doctors' offices or hospitals and sell their services to a limited
number of customers.
Management believes that the largest company currently in the surgical
laser rental business is Medical Alliance, Inc. ("MAI"), of Irving, TX, a
publicly traded company with current revenues of about $20 million. MAI has
recently concentrated its efforts on renting equipment mainly in physician
offices. This approach is limited to procedures done without general
anesthesia. MRM services the same physicians' office market, plus the larger
market of hospitals, which provides a more consistent business base.
9
<PAGE>
Major competitors in the hospital medical equipment rental market include
Universal Hospital Services and Mediq PRN. The Company believes that, as a
specialist, it can better satisfy the hospitals' needs for medical rental
equipment at satisfactory profit margins. Even though management believes it
will continue to be able to compete, there can be no assurance that the
Company will be successful in doing so.
REORGANIZATION
On July 31, 1996, PRI entered into a Plan and Agreement of Reorganization
("Plan") with Kendall Management Corporation ("Kendall"). Pursuant to the
Plan, Kendall acquired all of PRI's common stock in exchange for 5,100,720
shares of Kendall common stock representing approximately 83.6% of the
outstanding common stock of Kendall. In addition, Kendall issued its options
exercisable into 81,804 shares of Kendall common stock in exchange for PRI
options. Subsequent to the reorganization, Kendall changed its name to
Medical Resources Management, Inc. As a result, PRI became a subsidiary of
Kendall.
The tax-free exchange was pursuant to the provisions of Sections 351 and
368(a)(1)(B) of the Internal Revenue Code. For financial statement purposes,
the transaction has been accounted for as a reverse acquisition as if PRI
issued its common stock for the net assets of Kendall. Kendall was not an
operating company.
YEAR 2000 ISSUES
The Company believes that entering into the year 2000 will have little or
no impact on its systems.
EMPLOYEES
As of October 31, 1997, the Company employed 91 full time persons, 44 of
which were involved in technical activities (most of these were active as
field technicians), 22 of which were involved in sales and marketing, and 25
of which were involved in administration and accounting. In addition, the
Company employs 8 part time and occasional employees as technicians to handle
overload situations. None of these employees is represented by a union. The
Company believes that its relationship with its employees is good.
10
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ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 14,500 square feet of space for its
headquarters in Glendale, California on a lease that expires in 2001, for
$9,830 per month, with a CPI based rent escalation clause. The Company also
leases about 2,000 square feet of space for its field and sales office in
Dublin, California under a lease that expires in 2001, for $1,907 per month,
with a CPI based rent escalation clause.
In addition, it leases field and sales offices in Stockton, CA, Boise, ID,
Englewood, CO, Phoenix, AZ and Las Vegas, NV. Total combined square footage
is 11,200 for approximately $9,900 per month, and each lease is for three
years or less.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
11
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The common stock of the Company is traded under the symbol "MRMC" in the
over-the-counter market through the NASD's electronic OTC Bulletin Board
service. The following table sets forth the range of high and low bid and
ask prices per share of the common stock for each of the periods indicated.
These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions, and may not necessarily represent actual
transactions. Quotations for periods prior to July 31, 1996 are for the
common stock of Kendall Management Corporation prior to the Reorganization.
<TABLE>
<CAPTION>
Bid Prices
-------------------
High Low
---- ---
<S> <C> <C>
Quarter ended:
January 31, 1996 $ 1.50 $ 1.50
April 30, 1996 $ 2.50 $ 0.875
July 31, 1996 $ 3.00 $ 1.125
October 31, 1996 $ 3.00 $ 1.125
January 31, 1997 $ 2.25 $ 1.25
April 30, 1997 $ 2.00 $ 1.25
July 31, 1997 $ 1.87 $ 1.00
October 31, 1997 $ 1.50 $ 0.625
January 30, 1998 $ 0.9375 $ 0.625
</TABLE>
HOLDERS OF COMMON STOCK
As of October 31, 1997, the number of holders of record of common stock
was 411, excluding approximately eight accounts in "nominee" or "street" name.
DIVIDENDS
To date, the Company has not paid any cash dividends on its common stock
and does not anticipate paying cash dividends in the foreseeable future. The
Company anticipates that all earnings, if any, for the foreseeable future
will be retained for development of the Company's business.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis should be read together with the
financial statements and notes thereto included elsewhere herein.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items included in the Statements of
Income:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1996
------- -------
<S> <C> <C>
Net revenues ................................. 100.0% 100.0%
Cost of revenues ............................. 55.7 57.0
------- -------
Gross profit ................................. 44.3 43.0
Selling expenses ............................. 18.3 14.7
General and administrative expenses .......... 19.9 18.3
------- -------
Operating income ............................. 6.1 10.0
Interest expense ............................. 6.0 4.6
------- -------
Income before income taxes ................... 0.1 5.4
Provision for income taxes ................... 0.0 2.3
------- -------
Net income ................................... 0.1% 3.1%
------- -------
------- -------
</TABLE>
YEAR ENDED OCTOBER 31, 1997 COMPARED TO YEAR ENDED OCTOBER 31, 1996
Net revenues for the year ended October 31, 1997 were $8.11 million,
compared to $6.69 million for the prior fiscal year, an increase of $1.41
million, or 21.1%. The increase in net revenues for fiscal 1997 over fiscal
1996 is entirely the result of (1) revenues from the operations of Pulse of
$1.07 million since the date of its acquisition, (2) revenues from Laser
Medical of $225,000 since the date of its acquisition and (3) an increase of
$118,000 in revenues of PRI.
Cost of revenues for the year ended October 31, 1997 was $4.52 million, or
55.7% of net revenues, compared to $3.82 million, or 57.0% of net revenues,
in the prior fiscal year, an increase of $702,000, or 18.4%. The increase in
cost of revenues for the most recent fiscal year compared to the prior year
is attributable to (1) cost of revenues from the operations of Pulse of
$742,000 since the date of its acquisition and (2) cost of revenues from
Laser Medical of $131,000 since the date of its acquisition, offset in part
by a decrease of $171,000 in the cost of revenues of PRI, principally as a
result of lower depreciation expense. The decrease in depreciation expense
for PRI is principally due to a lengthening of the estimated useful life of
certain medical rental equipment in the latter part of fiscal 1997. The
estimated useful life of certain medical equipment was increased from 7 years
to 9 years, which decreased depreciation expense by approximately $70,000.
The decrease in cost of revenues as a percentage of net revenues is primarily
attributable to increased revenues from medical equipment rentals, which
generally have lower cost of revenues than mobile laser/surgical services.
Gross profit for the fiscal year ended October 31, 1997 was $3.59 million,
or 44.3% of net revenues, compared to $2.88 million, or 43.0% of net
revenues, in the year ended October 31, 1996, an increase of $709,000, or
24.6%. The increase in gross profit for fiscal 1997 compared to fiscal 1996
is principally due to (1) the addition of $326,000 of gross profit from the
operations of Pulse since the date of its acquisition, (2) the addition of
$94,000 of gross profit from the operations of Laser Medical since the date
of its acquisition, and (3) an increase of $289,000 in the gross profit of
PRI due to an increase in higher margin equipment rental revenues, as well as
lower depreciation expense. The increase in gross profit as a percentage of
revenues is principally attributable to an increase in overall revenues from
medical rentals, which generally have higher gross profit margins than
revenues from mobile laser/surgical services.
13
<PAGE>
Selling expenses for the year ended October 31, 1997 increased by $501,000,
or 51.1%, from $981,000 during the prior fiscal year. As a percentage of net
revenues, selling expenses increased to 18.3% in the year ended October 31,
1997, compared to 14.7% in the prior fiscal year. The increase in selling
expense is primarily the result of (1) the addition of $162,000 of selling
expenses from the operations of Pulse since the date of its acquisition, (2)
the addition of $26,000 of selling expenses from the operations of Laser
Medical since the date of its acquisition, and (3) an increase of $313,000 in
the selling expenses of PRI due to (a) the addition of sales representatives in
the California market, (b) an increase in the compensation levels of existing
sales personnel and (c) the addition of marketing personnel.
General and administrative ("G&A") expenses increased from $1.22 million
in the year ended October 31, 1996 to $1.61 million in the year ended October
31, 1997, an increase of $391,000, or 31.9%. As a percentage of net
revenues, such expenses increased from 18.3% in the prior fiscal year to
20.0% in the current fiscal year. The increase in G&A expenses is
principally attributable to (1) the addition of $149,000 of G&A expenses from
the operations of Pulse since the date of its acquisition, (2) the addition
of $5,000 of G&A expenses from the operations of Laser Medical since the date
of its acquisition, and (3) an increase of $237,000 in the G&A expenses of
PRI due to (a) higher salaries and wages resulting from the hiring of certain
new employees in the accounting and finance departments of the Company, (b)
increased costs associated with public relations and the administration of a
public company and (c) increased amortization expenses relating to goodwill,
non-compete agreements and customer list.
In the fourth quarter of fiscal 1997, the Company generated an operating
loss of $123,000 and a loss before taxes of $268,000, due primarily to
increases in selling expenses and G&A expenses incurred as a result of the
acquisitions of Pulse, Laser Medical and Med Surg, including 1) increased
amortization expenses relating to goodwill and non-compete agreements, 2)
additions to PRI sales and marketing staff in anticipation of higher revenues
in fiscal 1998, and 3) increased sales commission expense relating to higher
revenues. In partial response to these higher expenses, the Company has
initiated a revised sales commission plan for much of its sales force based
in part upon gross margins rather than revenues, and has taken other steps to
reduce selling and G&A expenses.
Operating income was $490,000 in the year ended October 31, 1997, or 6.1%
of revenues, compared to $673,000 in the year ended October 31, 1996, or
10.1% of net revenues. This decrease in operating income of $183,000 from
the 1996 fiscal year to the 1997 fiscal year is attributable to the factors
previously cited above.
Interest expense for the year ended October 31, 1997 was $487,000,
compared to $308,000 in the prior fiscal year, an increase of $179,000, or
58.1%. The increase in interest expense is the result of (1) the addition of
$93,000 of interest expense relating to the operations of Pulse since the
date of its acquisition, (2) the addition of $17,000 of interest expense
relating to the operations of Laser Medical since the date of its
acquisition, and (3) an increase of $69,000 in the interest expense of PRI
due to an increased level of indebtedness relating to the acquisition of
laser and medical rental equipment during fiscal year 1997.
Income before income taxes was $2,000 in the year ended October 31, 1997
compared to income before taxes of $365,000 in the year ended October 31,
1996, a decrease of $363,000. Income before income taxes, as a percentage of
revenues, declined to 0.1% in the year ended October 31, 1997 from 5.5% in
the year ended October 31, 1996 as a result of the aforementioned factors.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from the funding of its working
capital needs, principally accounts receivable and inventories, as well as
its capital expenditure needs. The Company's primary source for working
capital has historically been borrowings under debt facilities, as well as
the sale of common stock.
Net cash provided by operating activities during the year ended October
31, 1997 was $111,000, which resulted primarily from (a) net income of $1,000
and (b) depreciation and amortization expense of $966,000. These sources of
cash were offset in part by (a) a net increase of approximately $838,000 in
working capital items and (b) a decrease in long-term deferred income tax
liabilities of $18,000.
14
<PAGE>
Net cash used for investing activities during the fiscal year ended
October 31, 1997 was $731,000, which consisted of (a) $444,000 in capital
expenditures, (b) the payment of $130,000 for non-compete agreements and (c)
an increase in deposits and other assets of $157,000.
During the year ended October 31, 1997, the Company's cash provided by
financing activities totaled $673,000, consisting primarily of (a) $1.23
million in borrowings under term debt facilities, (b) $1.19 million in
borrowings related to capital leases for existing equipment and (c) $324,000
in net proceeds from the Company's private offering of units consisting of
common stock and warrants. Such cash provided by financing activities was
offset in part by (a) principal payments on long-term debt of $665,000 and
(b) principal payments on capital lease obligations of $1.32 million.
Between November 1, 1996 and April 30, 1997, the Company received $324,000
(net of related expenses) from the issuance of 291,600 units in a private
placement. Each unit consisted of (1) one share of common stock, (2) one
Class A warrant to purchase one share of common stock, at any time prior to
November 1, 1999, at a price of $2.50 per share, and (3) one Class B warrant
to purchase one share of common stock, at any time prior to November 1, 1999,
at a price of $4.00 per share.
COMMITMENTS
The Company had no material commitments for capital expenditures at
October 31, 1997. However, although it has no present commitments or
agreements to make such capital expenditures, during the next 12 months the
Company expects to make substantial capital expenditures, in accordance with
its historical practice. The mobile laser/surgical services and medical
equipment rental businesses are capital intensive. The Company believes that
funds generated from operations, together with funds available from capital
lease facilities that the Company expects to obtain during the year ending
October 31, 1998, will be sufficient to finance its working capital and
capital expenditure requirements for the next 12 months.
ITEM 7. FINANCIAL STATEMENTS.
See financial statements included herein.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
Not applicable.
15
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following information concerns the directors and executive officers of
the Registrant as of October 31, 1997:
The information contained in the Company's Proxy Statement filed with the
Securities and Exchange Commission, on March 2, 1998, with respect to
directors and executive officers of the Company and "Compliance with Section
16(a) of the Securities Exchange Act of 1934" is hereby incorporated by
reference in response to this item.
ITEM 10. EXECUTIVE COMPENSATION
The information contained in the Company's Proxy Statement filed with the
Securities and Exchange Commission, on March 2, 1998, with respect to
executive compensation and transactions, is hereby incorporated by reference
in response to this item.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Company's Proxy Statement filed with the
Securities and Exchange Commission, on March 2, 1998, with respect to
security ownership of certain beneficial owners and management, is hereby
incorporated by reference in response to this item.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained in the Company's Proxy Statement filed with the
Securities and Exchange Commission, on March 2, 1998, with respect to certain
relationships and related transactions, is hereby incorporated by reference
in response to this item.
16
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Documents filed with Registrant's Form 10-KSB for the fiscal year ended
October 31, 1997 and incorporated by reference herein:
1. Financial Statements:
Report of Independent Auditors
Consolidated Balance Sheet - October 31, 1997
Consolidated Statements of Income - Years Ended October 31,
1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity -
Years Ended October 31, 1997 and 1996
Consolidated Statements of Cash Flows - Years Ended
October 31, 1997 and 1996
Notes to Consolidated Financial Statements
2. Exhibits:
See Exhibits Index. The exhibits listed in the accompanying
Exhibit Index are filed or incorporated by reference as part of this
report.
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the quarter
ended October 31, 1997.
17
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) 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 in
the City of Glendale, California on the 18th day of May, 1998.
MEDICAL RESOURCES MANAGEMENT, INC.
By /s/ Allen H. Bonnifield
----------------------------------------------------
Allen H. Bonnifield, President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 18th day of May, 1998.
SIGNATURE TITLE
By /s/ ALLEN H. BONNIFIELD
----------------------------------
Allen H. Bonnifield President and CEO
By /s/ DOUG HANSEN
----------------------------------
Doug Hansen Vice President, CFO and
Principal Accounting Officer
By /s/ ROBERT STUCKELMAN
----------------------------------
Robert Stuckelman Director
By /s/ STEPHEN COUGHLIN
----------------------------------
Stephen Coughlin Director and President of
Pulse Medical Products, Inc.
By /s/ GREGORY BONNIFIELD
----------------------------------
Gregory Bonnifield Director and President of
Physiologic Reps, Inc.
18
<PAGE>
EXHIBITS INDEX
EXHIBIT EXHIBIT DESCRIPTION
NUMBER
2.1 Articles of Incorporation and Amendments thereto. (1)
2.2 By-Laws of the Registrant. (1)
3.1 Copy of a Warrant Agreement and Warrant issued between November 1996
and March 1997 to investors in the Registrant's Private Placement. (1)
6.1 Plan and Agreement of Reorganization between the Registrant and
Physiologic Reps, Inc. dated July 31, 1996. (1)
6.2 Registrant's 1996 Stock Incentive Plan. (1)
6.3 Term Loan and Security Agreement dated March 28, 1995 between the
Registrant and Merrill Lynch Business Financial Services, Inc. (1)
6.4 Term Loan and Security Agreement dated June 5, 1996 between the
Registrant and Merrill Lynch Business Financial Services, Inc. (1)
6.5 WCMA Note, Loan and Security Agreement dated June 5, 1996 between the
Registrant and Merrill Lynch Business Financial Services, Inc. (1)
6.6 Plan and Agreement of Reorganization between the Registrant and Pulse
Medical Products, Inc. dated March 31, 1997. (1)
6.7 Equipment Note Loan and Security Agreement dated April 24, 1997
between the Registrant and LINC Capital Management, a division of LINC
Capital, Inc. (1)
6.8 Collateral Note No. 1 dated April 28, 1997 between the Registrant and
LINC Capital, Inc. (1)
6.9 Lease Modification Agreement dated April 24, 1997 between Pulse
Medical Products, Inc. and LINC Capital Management, a division of LINC
Capital, Inc. (1)
6.10 Warrant Purchase Agreement dated April 24, 1997 between the Registrant
and LINC Capital Management, a division of LINC Capital, Inc. (1)
6.11 Warrant to Purchase Shares of Common Stock dated April 24, 1997
between the Registrant and LINC Capital Management, a division of LINC
Capital, Inc. (1)
6.12 Term Note and Security Agreement dated July 10, 1997 between the
Registrant and Merrill Lynch Business Financial Services. (2)
19
<PAGE>
EXHIBIT EXHIBIT DESCRIPTION
NUMBER
6.13 Plan and Agreement of Reorganization between the Registrant and
Laser Medical, Inc. dated June 27, 1997. (3)
6.14 Plan and Agreement of Reorganization between the Registrant and
Med Surg Specialties, Inc. dated June 30, 1997. (3)
(1) Exhibit filed with Registrant's Form 10-SB on May 16, 1997 and
incorporated by reference herein.
(2) Exhibit filed with Registrant's Form 10-QSB for the quarter ended July 31,
1997 and incorporated by reference herein.
(3) Exhibit filed with Registrant's Form 10-KSB for the fiscal year ended
October 31, 1997 and incorporated by reference herein.
20
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
Medical Resources Management, Inc.
We have audited the accompanying consolidated balance sheet of Medical
Resources Management, Inc. and subsidiaries as of October 31, 1997, and the
related consolidated statements of income, shareholders' equity, and cash
flows for each of the two years in the period ended October 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Medical Resources Management, Inc. and subsidiaries at October 31, 1997,
and the results of their operations and their cash flows for each of the two
years in the period ended October 31, 1997, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
February 10, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
Medical Resources Management, Inc. and Subsidiaries
Consolidated Balance Sheet
October 31, 1997
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 64,356
Accounts receivable, less allowance of $72,000 (NOTE 4) 1,829,695
Inventories (NOTE 4) 583,149
Prepaid expenses 94,378
Income tax receivable 55,113
------------
Total current assets 2,626,691
Property and equipment (NOTES 3 AND 4):
Rental equipment (NOTE 3) 16,216,245
Transportation equipment 847,492
Office furniture and equipment 311,657
Leasehold improvements 86,074
------------
17,461,468
Less accumulated depreciation 6,670,474
------------
Net property and equipment 10,790,994
Other assets:
Goodwill, net of accumulated amortization of $9,178 394,983
Covenants not to compete, net of accumulated amortization of $23,111 106,889
Customer list, net of accumulated amortization of $9,722 190,278
Deposits and other assets 175,563
------------
Total other assets 867,713
------------
Total assets $ 14,285,398
------------
------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Consolidated Balance Sheet (continued)
October 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 882,966
Accrued expenses 564,300
Notes payable 56,457
Current portion of long-term debt (NOTE 4) 527,771
Current portion of obligations under capital leases (NOTE 3) 1,495,611
------------
Total current liabilities 3,527,105
Long-term debt, net of current portion (NOTE 4) 2,090,695
Obligations under capital leases, net of current portion (NOTE 3) 4,728,500
Deferred income taxes (NOTE 5) 948,496
Commitments (NOTES 4 AND 9)
Shareholders' equity (NOTE 6):
Common stock, $.001 par value:
Authorized shares - 100,000,000
Issued and outstanding shares - 7,345,927 7,346
Additional paid-in capital 1,639,366
Retained earnings 1,343,890
------------
Total shareholders' equity 2,990,602
------------
Total liabilities and shareholders' equity $ 14,285,398
------------
------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
1997 1996
--------------------------
<S> <C> <C>
Revenue $ 8,105,140 $ 6,694,074
Cost of revenue, including depreciation expense of
$868,975 in 1997 and $690,504 in 1996 4,517,885 3,815,784
----------- -----------
Gross profit 3,587,255 2,878,290
Selling expenses 1,482,244 981,427
General and administrative expenses 1,615,612 1,223,965
----------- -----------
Operating income 489,399 672,898
Interest expense 487,391 307,746
----------- -----------
Income before income taxes 2,008 365,152
Provision for income taxes (NOTE 5) 800 156,098
----------- -----------
Net income $ 1,208 $ 209,054
----------- -----------
----------- -----------
Net income per common share $ .00 $ .04
----------- -----------
----------- -----------
Weighted average common shares 6,773,302 5,085,904
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
<TABLE>
<CAPTION>
Medical Resources Management, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Common Stock Additional Retained
Shares Amount Paid-in Capital Earnings Total
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at October 31, 1995 4,744,632 $ 4,745 $ 134,829 $ 1,133,628 $ 1,273,202
Issuance of stock 1,356,088 1,356 98,744 - 100,100
Net income for year - - - 209,054 209,054
----------------------------------------------------------------------
Balance at October 31, 1996 6,100,720 6,101 233,573 1,342,682 1,582,356
Issuance of stock (NOTES 2 and 6) 1,245,207 1,245 1,405,793 - 1,407,038
Net income for year - - - 1,208 1,208
----------------------------------------------------------------------
Balance at October 31, 1997 7,345,927 $ 7,346 $ 1,639,366 $ 1,343,890 $ 2,990,602
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
1997 1996
---------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,208 $ 209,054
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 966,436 844,172
Deferred income taxes (17,752) 194,087
Changes in operating assets and liabilities:
Accounts receivable (342,684) (84,949)
Inventories (279,267) 3,378
Prepaid expenses (39,890) (53,702)
Income tax receivable (18,859) (36,254)
Accounts payable (96,799) 67,174
Accrued expenses (61,605) (50,104)
Income taxes payable - (143,500)
---------------------------
Net cash provided by operating activities 110,788 949,356
INVESTING ACTIVITIES
Purchases of property and equipment (444,150) (1,249,147)
Payments for non-compete agreements (130,000) -
Increase in deposits and other assets (157,331) (3,472)
---------------------------
Net cash used for investing activities (731,481) (1,252,619)
FINANCING ACTIVITIES
Issuance of common stock 324,480 100,100
Borrowings on notes payable 24,185 -
Borrowings on long-term debt 1,231,024 1,468,862
Borrowings on capital lease refinancing 1,185,810 -
Principal payments on notes payable - shareholders - (35,872)
Principal payments on notes payable (111,191) (40,612)
Principal payments on long-term debt (664,872) (558,868)
Principal payments on capital lease obligations (1,316,869) (644,083)
---------------------------
Net cash provided by financing activities 672,567 289,527
Net increase (decrease) in cash 51,874 (13,736)
Cash and cash equivalents at beginning of period 12,482 26,218
---------------------------
Cash and cash equivalents at end of period $ 64,356 $ 12,482
---------------------------
---------------------------
SUPPLEMENTAL INFORMATION:
Cash paid during the period for:
Interest $ 464,253 $ 310,662
---------------------------
---------------------------
Taxes $ 40,050 $ 141,765
---------------------------
---------------------------
Capital lease obligations entered into for equipment $ 3,089,726 $ 975,589
---------------------------
---------------------------
Common stock issued for acquired companies $ 802,634 $ -
---------------------------
---------------------------
Common stock issued in exchange for forgiveness of debt $ 253,550 $ -
---------------------------
---------------------------
Common stock issued for forgiveness of accrued liabilities $ 26,325 $ -
---------------------------
---------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Medical Resources Management, Inc. (MRM or the Company) engages in the
business of renting medical equipment, providing associated technical
support, and also selling related supplies. Customers of the Company are
located throughout much of the western United States. The financial
statements include MRM, the holding company, consolidated with all of its
wholly owned subsidiaries (see Note 2 for 1997 acquisitions). All
significant intercompany accounts and transactions have been eliminated.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with maturities of three months or less when purchased to
be cash equivalents.
INVENTORIES
Inventories, consisting primarily of supplies, are stated at the lower of
cost (first-in, first-out) or market basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets, which
vary from five to ten years. Capitalized leases and leasehold improvements
are being amortized using the straight-line method over the shorter of the
lease term or estimated useful lives. Amortization of capital leases is
included in depreciation expense.
Expenditures for major renewals and betterments that extend the useful lives
of property and equipment are capitalized. Expenditures for maintenance and
repairs are charged as incurred.
INTANGIBLE ASSETS
Goodwill is amortized over a period of 15 years. Payments for non-compete
agreements are capitalized and then amortized over the period of the
non-compete agreement. Customer lists are amortized over a period of 12
years.
INCOME TAXES
The Company utilizes Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which prescribes the use of the liability
method to compute the differences between the tax basis of assets and
liabilities and the related financial reporting amounts using currently
enacted laws and rates.
F-7
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue at the time that the rental service is
rendered to the customer, including the providing of technical support.
STOCK-BASED COMPENSATION
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees," and intends
to continue doing so. In October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123). SFAS 123 established a fair
value-based method of accounting for compensation costs related to stock
options and other forms of stock-based compensation plans. However, SFAS 123
allows an entity to continue to measure compensation costs using the
principles of APB 25 if certain pro forma disclosures are made. SFAS 123 is
effective for fiscal years beginning after December 15, 1995. The Company
provides proforma disclosures of net income and earnings per share as if the
fair value-based method prescribed by SFAS 123 had been applied in measuring
compensation expense (Note 8).
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of temporary cash investments and trade
receivables. The Company places its temporary cash investments with banks.
Concentrations of credit risk with respect to trade receivables are limited
due to the Company's large number of customers primarily with small balances.
Management reviews these balances on a monthly basis and maintains reserves
for potential credit losses, which losses have historically been within
management's expectations. The Company generally sells on credit terms of 30
days and requires no collateral.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could vary from those estimates.
EARNINGS PER SHARE
Net income per share has been computed based on the weighted average number
of shares of common stock outstanding. Stock options have not been
considered because the effect was either not material or antidilutive.
LONG-LIVED ASSETS
Long-lived assets used in operations are reviewed periodically to determine
that the carrying values are not impaired. If indicators of impairment are
present, or if long-lived assets are expected to be disposed of at a loss,
impairment losses are recorded.
F-8
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's outstanding balances under its long-term
debt instruments approximates fair value because the interest rates on
outstanding borrowings vary according to current market rates or are set to
approximate market rates.
FINANCIAL STATEMENT PRESENTATION
Certain balances from the October 31, 1996 financial statements have been
reclassified to conform to the October 31, 1997 presentation.
NEW ACCOUNTING PRINCIPLES
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Accounting for Earnings Per
Share" (SFAS 128). This statement establishes standards for computing and
presenting earnings per share (EPS) and applies to entities with publicly
held common stock or potential common stock. SFAS 128 simplifies the
standards for computing EPS previously found in APB Opinion No. 15, Earnings
Per Share, and makes them comparable to international EPS. This statement is
effective for financial statements issued for periods ending after December
15, 1997. The Company will adopt this new standard in fiscal year 1998, and
has determined that the impact on the financial statements will be
insignificant.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). This statement establishes standards for reporting and
displaying comprehensive income and its components (revenue, expenses, gains
and losses) in financial statements. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. It is effective for
fiscal years beginning after December 15, 1997. The Company does not believe
that the current financial statement disclosure will need to be modified
based upon current operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (SFAS 131). This statement requires that
a public business enterprise report financial and descriptive information
about its reportable operating segments. Generally, financial information is
required to be reported on the basis that it is used internally for
evaluating segment performance and deciding how to allocate resources to
segments. SFAS 131 is effective for fiscal years beginning after December
15, 1997. The Company is reviewing the standard and does not believe that
there will be a significant impact on financial disclosures.
F-9
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. ACQUISITIONS
Effective March 31, 1997, the Company acquired 100% of the common stock of
Pulse Medical Products, Inc. (Pulse). Pulse provides medical rental
equipment in the Rocky Mountain area. The purchase price was $357,500
consisting of 325,000 shares of MRM's common stock (valued at $1.10 per
share). The transaction was accounted for as a purchase and, accordingly,
the results of operations of Pulse have been included in the statement of
income since April 1, 1997.
Effective June 30, 1997, the Company acquired 100% of the common stock of
Laser Medical, Inc. (Laser Medical). Laser Medical provides mobile
laser/surgical services principally in the states of Utah and Colorado. The
purchase price was $209,000 consisting of 190,000 shares of MRM's common
stock (valued at $1.10 per share). In addition, the Company obtained a
non-compete agreement from the principal former shareholder of Laser Medical
in consideration of the payment of $80,000 in cash. This transaction was
accounted for as a purchase and, accordingly, the results of operations of
Laser Medical have been included in the statement of income since July 1,
1997.
Also effective June 30, 1997, the Company acquired 100% of the common stock
of Med Surg Specialties, Inc. (Med Surg). The purchase price was $236,134
consisting of 214,667 shares of MRM's common stock (valued at $1.10 per
share). Med Surg provides mobile laser/surgical services in the Southern
California area. In addition, the Company obtained a non-compete agreement
from the principal former shareholder of Med Surg in consideration of the
payment of $138,000 in cash ($50,000 at closing, with the balance payable
$50,000 in 1998 and $38,000 in 1999). This transaction was accounted for as a
purchase and, accordingly, the results of operations of Med Surg have been
included in the statement of income since July 1, 1997.
The following unaudited proforma summary statements of earnings for the years
ended October 31, 1997 and 1996 of the Company and the acquisitions discussed
previously assuming all were effective on November 1, 1995. The proforma
information gives effect to certain adjustments, including primarily the
amortization of excess of costs over net assets acquired. This proforma
summary does not necessarily reflect the results of operations as they would
have been if the Company and the acquisitions had been a single entity during
such periods:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
1997 1996
-----------------------------
<S> <C> <C>
Total revenues $ 9,887,000 $ 10,820,000
Total expenses 10,028,000 10,572,000
-----------------------------
Net income (loss) $ (141,000) $ 248,000
-----------------------------
-----------------------------
Net income (loss) per common share $ (.02) $ .04
-----------------------------
-----------------------------
</TABLE>
Effective July 16, 1997, the Company acquired a 21.8% interest for $17,500 in
Santa Barbara Equipment, LLC (SBEL), a limited liability company formed by
the Company and certain physicians to operate a laser in Santa Barbara,
California. The Company manages SBEL and provides accounting and other
services to SBEL. The Company accounts for its interest in SBEL using the
equity method of accounting.
F-10
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. OBLIGATIONS UNDER CAPITAL LEASES
The Company leases certain equipment under capital lease obligations which
contain purchase options. Cost and accumulated depreciation of equipment
under capital leases included in equipment as of October 31, 1997 are as
follows:
<TABLE>
<S> <C>
Rental equipment $ 12,146,452
Less accumulated depreciation 4,879,719
------------
Net book value $ 7,266,733
------------
------------
</TABLE>
The following is a schedule by year of future minimum lease payments required
under the leases, together with their present value as of October 31, 1997:
<TABLE>
<S> <C>
1998 $ 2,217,636
1999 2,128,647
2000 1,825,226
2001 1,304,649
2002 623,899
-----------
Total minimum lease payments 8,100,057
Less amount representing interest 1,875,946
-----------
Present value of minimum lease payments due under capital leases 6,224,111
Less current portion 1,495,611
-----------
Obligations under capital leases, net of current portion $ 4,728,500
-----------
-----------
</TABLE>
F-11
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT
Long-term debt consists of the following at October 31, 1997:
<TABLE>
<S> <C>
Note payable to a finance company, payable in 60 monthly
installments of $33,333 plus interest at the 30-day
commercial paper rate plus 2.75% (8.2% at October 31, 1997),
secured by accounts receivable, inventories, equipment and the
personal guarantee of certain shareholders. $ 1,966,667
Various notes payable in monthly installments totaling $11,206
including interest varying between 9% and 16% per annum,
collateralized by trucks, vans and automobiles, maturing
through March 2002. 336,641
Notes payable to a finance company for a line of credit of
$300,206 maturing April 2001, bearing interest at a rate of
12% per annum, interest payable monthly, secured by the
accounts receivable and inventories of Pulse. 300,206
Other 14,952
-----------
Total long-term debt 2,618,466
Less current portion 527,771
-----------
Long-term debt, net of current portion $ 2,090,695
-----------
-----------
</TABLE>
Long-term debt matures as follows during the years ending October 31:
<TABLE>
<S> <C>
1998 $ 527,771
1999 498,338
2000 488,355
2001 734,584
2002 369,418
-----------
$ 2,618,466
-----------
-----------
</TABLE>
F-12
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. PROVISION FOR INCOME TAXES
The provisions for income taxes for the years ended October 31, 1997 and 1996
consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1997
CURRENT DEFERRED TOTAL
--------------------------------------
<S> <C> <C> <C>
Federal $ - $ (13,698) $ (13,698)
State 800 13,698 14,498
--------------------------------------
$ 800 $ - $ 800
--------------------------------------
--------------------------------------
YEAR ENDED OCTOBER 31, 1996
CURRENT DEFERRED TOTAL
--------------------------------------
Federal $ (32,588) $ 152,092 $ 119,504
State (5,401) 41,995 36,594
--------------------------------------
$ (37,989) $ 194,087 $ 156,098
--------------------------------------
--------------------------------------
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
at October 31, 1997 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 480,330
Allowance for doubtful accounts 62,848
Other 43,428
------------
Total deferred assets 586,606
Deferred tax liabilities:
Depreciation (1,534,527)
Other (575)
------------
Total deferred liabilities (1,535,102)
------------
Net deferred liabilities $ (948,496)
------------
------------
</TABLE>
A reconciliation of the provision for income taxes with the amounts obtained
by applying the federal statutory tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
1997 1996
---------------------
<S> <C> <C>
Income tax based on federal statutory rate $ 683 $ 124,150
State tax, net of federal tax benefit 106 22,316
Non-deductible expenses and other 11 9,632
------ ----------
$ 800 $ 156,098
------ ----------
------ ----------
</TABLE>
F-13
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. EQUITY
Between November 1, 1996 and March 31, 1997, the Company sold 291,600 Units
in a private offering. These Units consisted of 291,600 shares of common
stock, as well as 291,600 Class A warrants and 291,600 Class B warrants to
purchase, in the aggregate, 583,200 shares of common stock. The Units were
sold at $1.25 per Unit, resulting in gross proceeds of $364,500 and net
proceeds of $324,480 after expenses. The Class A and Class B warrants have
an exercise price of $2.50 and $4.00, respectively, and expire on November 1,
1999. As of October 31, 1997 no such warrants had been exercised.
During March 1997, the Company issued an additional 202,840 Units to certain
shareholders (including the principal officer of the Company) in exchange for
$253,550 of indebtedness owed to these shareholders. These Units consisted
of 202,840 shares of common stock, as well as 202,840 Class A warrants and
202,840 Class B warrants to purchase, in the aggregate, 405,680 shares of
common stock. The Units were issued at a rate of one Unit for each $1.25 of
shareholder debt forgiven. The Class A and Class B warrants have an exercise
price of $2.50 and $4.00, respectively, and expire on November 1, 1999. As
of October 31, 1997 no such warrants had been exercised.
In April 1997, in connection with a loan from a finance company, warrants
were granted to the finance company to purchase 100,000 shares of common
stock at a price of $2.00 per share, exercisable at any time during the six
years following the date of the loan.
7. BENEFIT PLAN
In June 1997, the Company adopted a defined contribution retirement plan
(Plan) which qualifies under Section 401(k) of the Internal Revenue Code.
The Plan covers substantially all employees with over one year of service.
The Company makes an annual election to provide matching contributions of up
to 50% of each participant's deferral up to a maximum of 3% of compensation.
The amount of matching contributions included in expense for the year ended
October 31, 1997 was $26,468.
F-14
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. STOCK OPTIONS
In September 1996, the Company adopted the 1996 Stock Incentive Plan (Plan)
to allow officers, employees and certain non-employees to receive certain
options to purchase common stock and to receive grants of common stock
subject to certain restrictions. Under the Plan, regular salaried employees,
including directors, who are full time employees, may be granted options
exercisable at not less than 100 percent of the fair market value of the
shares at the date of grant. The exercise price of any option granted to an
optionee who owns stock possessing more than ten percent of the voting power
of all classes of common stock of the Company must be 110 percent of the fair
market value of the common stock on the date of grant, and the duration may
not exceed five years. Options generally become exercisable at a rate of
one-third of the shares subject to option on each of the first, second and
third anniversary dates of the grant. The duration of options may not exceed
ten years. A maximum number of 1,500,000 shares of common stock may be
issued under the Plan. The following table summarizes stock option activity:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
1997 1996
----------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------------------- ---------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 424,804 $ 1.31 81,804 $ 0.50
Granted 874,000 $ 1.50 343,000 $ 1.50
Exercised - - - -
Forfeited or cancelled (52,500) $ 1.50 - -
----------------------- ---------------------
Outstanding at end of year 1,246,304 $ 1.44 424,804 $ 1.31
----------------------- ---------------------
----------------------- ---------------------
Options exercisable at year-end 149,856 $ 1.14 26,995 $ 0.50
----------------------- ---------------------
----------------------- ---------------------
</TABLE>
The weighted average fair value of options granted during the years ended
October 31, 1997 and 1996 was $1.34 and $1.18 at October 31, 1997 and 1996,
respectively. The weighted average remaining contractual life of stock
options was 9.28 years as of October 31, 1997. The range of prices of
outstanding options under the Plan at October 31, 1997 was $0.50 to $2.125.
F-15
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. STOCK OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
1997 1996
------------- -----------
<S> <C> <C>
Net income as reported $ 1,208 $ 209,054
------------ -----------
------------ -----------
Proforma net income (loss) $ (173,220) $ 191,497
------------ -----------
------------ -----------
Net income per common share as reported $ .00 $ .03
------------ -----------
------------ -----------
Proforma net income (loss) per common share $ (.02) $ .03
------------ -----------
------------ -----------
</TABLE>
The Company utilized the Black-Scholes method to estimate the fair value of
options, which includes the weighted average calculation of the fair value
using the following assumptions: (i) a risk-free interest rate of 10%; (ii)
an expected life of 8 years; (iii) expected volatility of 1.6; and (iv) no
expected dividends.
9. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company leases premises under non-cancelable operating leases expiring in
various years through 2001. The lease on the corporate headquarters contains
provisions for cost of living increases and certain options to renew for a
period of five additional years. Other facilities are on a month to month
basis. Future minimum lease payments are as follows during the years ending
October 31:
<TABLE>
<S> <C>
1998 $ 219,400
1999 201,174
2000 171,976
2001 81,410
2002 -
----------
$ 673,960
----------
----------
</TABLE>
Rent expense was $218,337 and $141,794 for the years ended October 31, 1997
and 1996, respectively.
The Company has borrowed money from two principal shareholders, including the
principal officer of the Company. The notes payable to shareholders bore
interest at rates ranging from 10% to 12% and were subordinated to the notes
payable to a finance company. In 1997, amounts owed pursuant to such
borrowings were repaid with common stock of the Company (see Note 6).
The Company paid consulting fees to a member of the Board of Directors in the
amount of $48,000 during the fiscal year ended October 31, 1997.
10. EMPLOYEE STOCK OWNERSHIP PLAN
On August 7, 1992, the Company formed an employee stock ownership plan (ESOP)
for the benefit of all employees meeting certain minimum age and length of
service requirements. Contributions are discretionary and are determined
annually by the Board of Directors. No contribution was made for either of
the years ended October 31, 1997 or 1996.
F-16
